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5 Progress in the International Development and Trading Framework

Author(s):
International Monetary Fund
Published Date:
May 2011
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The global economy has weathered the financial crisis, but the recovery remains fragile. Governments and international institutions cooperated in the face of recession, thus avoiding the perils of a protectionist spiral, maintaining aid levels, and boosting emergency financial resources. Because a beneficial global environment also supports progress toward the Millennium Development Goals (MDGs), this chapter reviews recent changes in the international development framework—in the context of the gradual transformation of development policies over the past decade.

Aid in 2010 rose in real terms over 2009, despite fears that the sharp rise in fiscal deficits during the crisis would severely constrain donor budgets. Even so, recent research suggests that declines in aid have tended to deepen for a period of years following past banking crises. Some major donor governments remained dedicated to maintaining aid in 2010, while others announced cuts.

New donors that are not members of the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) may provide some $12 billion to $15 billion in aid disbursements a year. There is keen interest to engage with them at the Fourth High Level Forum on Aid Effectiveness, to be held in Busan, Republic of Korea, at the end of 2011. The objective is to forge a new consensus on development assistance coming out of Busan—one that reflects the growing role of non-OECD-DAC countries. Developing countries are also receiving more assistance from private sources. Philanthropic flows to developing countries from the private sector in advanced countries may have exceeded $60 billion in 2008, more than 10 times the amount received early in the decade.

Nonetheless, new donor flows will not compensate for any significant fall in aid from traditional donors, particularly if they pursue different development priorities and practices. The changing aid landscape could also have implications for the transparency of official flows and for the policies and programs that aid supports.

World trade, recovering at about double the 2002-08 rate of growth, remains well below the precrisis peak and even lower than it would have been if trade had continued to follow the rising 1995-2008 trend. The new protectionist measures during the crisis, which hit the exports of least-developed countries (LDCs), appear to be receding. Solidifying an open, rules-based international trade regime can best be accomplished by (finally) concluding the Doha Round. Efforts to increase trade integration of the poorest developing countries should focus on extending duty-free, quota-free access to their exports, providing financial resources and technical assistance to improve trade facilitation, and simplifying rules of origin in preference agreements. Regional trade agreements should support open trade through low external tariffs, and technical assistance to developing-country trade negotiators would support deeper regional integration. International efforts to avoid a collapse in trade finance during the crisis were timely and successful. But further steps are required to ensure that low-income countries can obtain trade finance at reasonable cost, along with improvements in data and a review of whether banking regulations impose excessive capital requirements on trade finance transactions.

The past tumultuous decade has ushered in significant changes in the assistance policies of the international institutions. The multilateral development banks have developed a results-based, country-driven assistance framework grounded in regular reviews of country strategy and independent evaluations. A more diverse and flexible range of financing facilities has helped tailor assistance to the needs of particular countries (such as those affected by conflict) and in particular situations (such as disaster relief and crisis assistance). The international financial institutions (IFIs) also are doing more in providing knowledge in the context of loans and technical assistance to their clients, both through global projects and programs and through the free provision of information to the global community. The financing provided to crisis-affected countries jumped sharply with the onset of the crisis, leading to a general increase in IFI resources.

An unprecedented decade for aid

Economic and political events since the Millennium Declaration in 2000 have reordered the aid framework. Booming economic growth, higher capital flows, and surging trade flows were followed by the worst economic crisis since the Great Depression. Wars have led to shifts in priorities among international donors. And China and India, with some other developing countries, have emerged as economic powerhouses.

Over the last decade, donors reaffirmed their commitments to increasing aid flows and improving aid quality, as in the Monterrey Declaration at the 2002 Financing for Development conference in Mexico and the Gleneagles G-8 and Millennium +5 summits in 2005. At the September 2010 United Nations Summit on MDGs, held in New York, representatives of key stakeholders—including governments, international organizations, and private and public sectors—reaffirmed their commitment to work together to achieve the MDGs in the five years left.

Will the crisis undermine recent commitments?

This reaffirmation was all the more remarkable, given the potential impact of the crisis on donor budgets. These may be threatened as high income countries struggle to control fiscal deficits. Even so, aid flows from DAC donors rose in 2010 (to $128.7 billion in 2010 from $119.8 billion in 2009, a 6.5 percent increase in real terms). Despite various shortfalls against commitments, the impact of the financial crisis on aid, at least in 2009 and 2010, was relatively mild. Official development assistance (ODA) as a percentage of gross national income (GNI) rose from 0.26 percent in 2004 to 0.31 percent in 2009 and to 0.32 percent in 2010.

The United States remained the largest donor in 2009 ($28.8 billion), with France ($12.6 billion), Germany ($12.1 billion, the United Kingdom ($11.5 billion), and Japan ($9.5 billion) following. With a net inflow of $6.1 billion, Afghanistan was the largest recipient in 2009, followed by Ethiopia ($3.8 billion), Vietnam ($3.7 billion), West Bank and Gaza ($3.0 billion), and Tanzania ($2.9 billion) (box 5.1). The amount of aid for debt relief and technical assistance as a share of total net official development assistance declined.

Box 5.1Aid recipients

Aggregate aid flows often reflect geopolitical priorities and/or responses to major global events. It is therefore not a surprise that Iraq and Afghanistan were the largest aid recipients over the last decade (top table below). In per capita terms, the pattern is also mixed at the country level. The top 10 recipients in per capita net official development assistance in 2008 were West Bank and Gaza ($659), Botswana ($373), Liberia ($330), Iraq ($321), Lebanon ($257), Timor-Leste ($253), Georgia ($206), Afghanistan ($168), Serbia ($142), and the Democratic Republic of Congo ($140).

Low-income countries captured the largest share net official development assistance in 2008 and received the highest amount in per capita terms. By geographic region, Sub-Saharan Africa received the highest aggregate aid flows, but it is second to the Middle East and North Africa in per capita terms (lower table below)

Largest aid recipients by decadebillions, constant 2008 US$
1960-69
India64.7
Pakistan25.1
Algeria20.7
Vietnam17.5
Korea, Rep.14.5
Brazil13.1
Turkey12.6
Indonesia12.4
Congo, Dem. Rep.8.4
Israel8.1
1970-79
India44.8
Egypt, Arab Rep.44.8
Indonesia25.1
Pakistan21.2
Bangladesh19.5
Syrian Arab Republic18.2
Vietnam15.6
Israel13.6
Jordan12.4
Korea, Rep.10.5
1980-89
India42.4
Egypt, Arab Rep.31.0
Bangladesh29.6
Israel23.2
Indonesia20.9
Pakistan20.5
China19.5
Syrian Arab Republic18.7
Sudan18.6
Tanzania16.9
1990-99
Egypt, Arab Rep.41.1
China33.6
India25.0
Bangladesh21.3
Indonesia18.9
Mozambique16.3
Tanzania15.2
Israel14.4
Pakistan14.0
Ethiopia13.3
2000-09
Iraq68.1
Afghanistan35.5
Nigeria29.2
Ethiopia27.4
Vietnam27.4
Tanzania25.4
Congo, Dem. Rep.24.8
Pakistan23.4
Mozambique21.1
India20.6
Source: DAC database.
Source: DAC database.
Aid flows by income groups and region, 2008
Income groups and regionsTotal ($ billions)Per capita ($)
Income
Low41.442
Lower middle37.110
Higher middle11.812
Regions
East Asia and Pacific9.15
Europe and Central Asia8.219
Latin America and the Caribbean9.316
Middle East and North Africa23.673
South Asia12.38
Sub-Saharan Africa40.149
Source: Word Development Indicators database.
Source: Word Development Indicators database.

The largest increases in real terms in ODA between 2009 and 2010 were recorded by Australia, Belgium, Canada, Japan, Korea, Portugal, and the United Kingdom. Many countries (for example, the United Kingdom) have maintained their original commitments to aid flows made at the Gleneagles G-8 and Millennium +5 summits in 2005. Other donor countries, however, have announced shifts in their aid policy because aid budgets are under strain and economic growth in many high-income countries is slow in recovering to pre-crisis levels. The Dutch government plans to cut foreign aid from 0.8 percent to 0.7 percent of gross national income. Ireland and Spain have already cut their aid budgets, and France has announced a postponement of its commitments.

The year 2010 marked an important target for DAC countries that are part of the European Union. In 2005, they collectively agreed to increase aid to 0.56 percent of gross national income within five years, with a minimum country requirement of 0.51 percent. Some countries—including Belgium, Finland, Denmark, Ireland, Luxembourg, the Netherlands, Spain, Sweden, and the United Kingdom—appear to be on track to meet this goal.1 Others—including Austria, France, Germany, Greece, Italy, and Portugal—appear unlikely to reach it. Similarly, the United States set the goal of doubling its aid to Sub-Saharan Africa between 2004 and 2010. It achieved this in 2009. Japan, by contrast, fell short of its Gleneagles promise that its aid during 2005-09 would equal $10 billion more than if it had remained at the 2004 level, owing to serious budgetary constraints.

Overall, donor countries have remained pretty much on track in meeting their aid commitments, despite the economic downturn. But we will only really know the true impact of the crisis on aid several years down the road. Reinhart and Rogoff argue that the full impact on aid flows of a recession following a banking crisis can be felt for several years after the crisis, owing to enduring effects of the crisis on the country’s fiscal position and growth prospects.2 Similarly, Dang, Knack, and Rogers find that aid flows during 1977-2007 fell by 20-25 percent, on average, from donor countries with banking crises, beyond any income-related effects (figure 5.1).3 And the effects can last as long as 10 years after the onset of a crisis.4 Is this pattern going to repeat itself?

FIGURE 5.1Impact of banking crises on net disbursed aid provided by crisis-affected donors, 1977–2007

New donors appear on the scene

During most of the last half of a century, DAC donors, with international organizations, accounted for most aid flows. Since 1960, the United States, Japan, Germany, France, and the United Kingdom have been the largest donors in absolute terms; and the Nordic countries have given the most, relative to gross national income.5

But the global balance of aid has started to shift rapidly in the past five years because some developing countries’ recent strong growth gives them more resources to share in development. There is a clear lack of reliable data. Until recently, the DAC Creditor Reporting System, which captures only a partial picture of total aid flows, was the only available database. DAC donors are required to report their financial flows to the OECD, whereas non-DAC donors can voluntarily provide the information to the organization. Twenty non-DAC donors now report to the OECD. Some of them—such as Saudi Arabia, Thailand, and Turkey—provide significant amounts of aid. Overall, non-DAC donors reporting to the DAC contributed 5 percent of net aid ($6.7 billion in current dollars) in 2009. But other non-DAC donors making significant contributions to development assistance are not recorded by DAC, including Brazil, China, India, Malaysia, the Russian Federation, and República Bolivariana de Venezuela.

In total, non-DAC donors provided about $12 billion to $15 billion in aid in 2008.6 Arab countries together would constitute the largest non-DAC donor, contributing $5.9 billion.7 Development assistance from the BRIC countries (Brazil, Russia, India, and China) is estimated in the range of $2.3-$5.1 billion in fiscal 2006/07, with Chinese assistance at $1.4 billion to $3.0 billion. These figures may be underestimated. China’s aid to Africa alone was estimated at nearly $2.5 billion in 2009.8

Flows from multilateral institutions grew to $28 billion in 2009, and the number of institutions has increased. There are now more than 260 multilateral aid agencies, including development banks, the United Nations, and specialized funds that have become important or have been set up in recent years.9 These funds tend to deliver aid with a special focus, such as HIV prevention and treatment, vaccines, or disaster prevention and relief.

Other key aid flows in recent years have come from civil society organizations and private philanthropists. No reliable figures exist for total aid from this group, but one recent estimate has their total aid reaching $53 billion in 2008, more than 10 times the amount early in the decade.10 The largest is the Gates Foundation, which has a total asset trust endowment of more than $35 billion and annual disbursements of $3 billion to $4 billion.11 Additional work is clearly needed to systematically gather more reliable data.

Still, the emergence of new aid flows and actors has led to changes and increased the complexity of the aid architecture, requiring a new consensus on aid effectiveness. With so many actors, donor activities are less likely to be coordinated effectively in recipient countries. Aid-funded projects are also likely to follow different rules, increasing the risk of more fragmentation and higher transaction costs for donors and recipients. Moreover, differences in aid policies may undermine aid effectiveness through a lack of transparency, possible violations of international aid and governance standards, and unfair competition. Incorporating the viewpoints of new actors is likely to enrich the discussions and bring key voices of the international community into this important global dialogue.

Aid effectiveness

Aid effectiveness is a critical agenda for partner-countries, donors, and other aid providers—including the World Bank. The importance of results of development efforts, including external assistance, is the fourth pillar of new research directions at the World Bank.12 The 2005 Paris Declaration on Aid Effectiveness and the 2008 Accra Agenda for Action have focused on the following principles, intended to improve the quality and effectiveness of aid:

1. strengthening country ownership of development,

2. building more effective and inclusive partnerships for development, and

3. delivering and accounting for development results.

Monitoring tools have been developed to improve the accountability of donors and aid recipients. The Survey on Monitoring the Paris Declaration was developed to monitor the implementation of these principles by measuring progress against the commitments made by both partner-countries and donors. To measure progress between 2005 and 2010, surveys—consisting of 12 quantitative indicators and qualitative information—were conducted in 2006 and 2008, with the third survey scheduled for 2011. An evaluation tool called the Evaluation of the Implementation of the Paris Declaration is intended to provide more comprehensive understanding of how increased aid effectiveness contributes to meeting development objectives (results forthcoming in the spring of 2011).

Several assessment tools have focused on the quality or effectiveness of donors, including by observers such as Easterly and Pfutze,13 Roodman,14 and the Brookings Institution’s Quality of Official Development Assistance Assessment (QuODA, developed in 2010). Other attempts sponsored by bilateral donors include the Multilateral Organizational Performance Assessment Network, the United Kingdom’s Multilateral Aid Review, and self-evaluations such as the Common Performance Assessment System. More recently, Knack, Rogers, and Eubank developed an index to compare donor performance and assess how well donors are delivering on their mandates.15 Two of these assessments are described here to provide a sense of the results:

  • In Knack, Rogers, and Eubank 2010, the selectivity subindex reviews policies and measures of poverty reduction, based primarily on GDP per capita and the World Bank’s Country Policy and Institutional Assessment index. The index covers the four most common dimensions of aid quality in the relevant literature—selectivity, alignment, harmonization, and specialization. Alignment focuses on ways that donor countries match their aid to support country priorities and policies outlined in country development strategies. Harmonization involves coordination among donors that is designed to avoid duplication and high transaction costs in recipient countries. The specialization subindex attempts to capture the fragmentation of donor aid, including geographic concentration of aid, concentration of aid by sector, and average size of projects. In the overall ranking of the quality index (the average of the four subindexes), Denmark came first among bilateral donors, followed by Ireland, the Netherlands, Sweden, and the United Kingdom; the Asian Development Bank (ADB) scored the highest among multilateral donors, followed by the World Bank, the International Monetary Fund (IMF), the International Fund for Agricultural Development, and the Global Alliance for Vaccines and Immunisation.
  • The QuODA Index, compiled by Nancy Birdsall and Homi Kharas, takes into account four broad categories covering 30 aid-related indicators: maximizing efficiency, fostering institutions, reducing the burden on recipients, and transparency and learning.16 Different from Knack, Rogers, and Eubank, QuODA does not aggregate across sectors because of the low correlations among the four categories. It also looks at both bilateral and multilateral agencies. The International Development Association (IDA) and Ireland scored in the top 10 for all four categories.

Transparency is emerging as a major component of aid effectiveness because it is essential to enhancing accountability. For donors, one of the most important initiatives is the International Aid Transparency Initiative, which aims at establishing common global reporting standards on aid and publishing aid information in a way that is accessible to various stakeholders for the purposes of global reporting and improving budget management by partner-countries. Progress on how donors rank on their transparency has been monitored in the 2010 report on “Aid Transparency Assessment.”17 For partner-countries, transparency in public finances is critical for accountability. Several frameworks attempt to measure fiscal transparency—frameworks such as the IMF’s Good Practices on Fiscal Transparency; the OECD’s Best Practices for Budget Transparency; the Public Expenditure and Financial Accountability assessments supported by the World Bank Group (WBG); and public sector accounting standards from the International Federation of Accountants, the International Organization of Supreme Audit Institutions, and the International Budget Project’s Open Budget Index.

The aim of these indexes is to give donor countries and organizations a metric for comparison as well as an objective framework for ways to improve the quality of aid over time. But aid is measured; a more fundamental question remains: does aid contribute to development at all?

The impact of aid

For decades, researchers have grappled with the question of whether foreign aid inflows lead to positive changes in a recipient country—economic and otherwise—and, if so, in what form. Does aid lead to long-term improvements in the recipient country in the form of increased growth? Or does it harm the economy in some way? And if it helps, what type of aid helps best?

Resolving these questions is critical for aid policy, particularly given the huge sums. Some studies find that aid has a positive impact on a country’s growth, others that a positive impact depends on certain economic and political factors, and still others that aid has no impact on growth. Indicators include macroeconomic factors, openness or trade variables, governance and political conditions, and geographic location.18 Burnside and Dollar’s seminal paper concluded that aid has a positive effect on growth in countries with good policy environments.19 But according to Doucouliagos and Paldam, no clear conclusion emerges from the aid literature.20

Analyzing the effectiveness of particular forms of aid, Clemens, Radelet, and Bhavnani find a positive relationship between economic growth and “short-impact aid.”21 Mavro-tas, reviewing the impact of different types of aid on Uganda’s fiscal sector, finds that project and food aid reduces public investment, whereas program aid and technical assistance increase it.22 Reddy and Minoiu, distinguishing between what they call developmental aid and geopolitical aid,23 find that the former has a strong, positive impact on growth, and the latter has a weak but negative relationship with growth.24 Heyman, in her sectoral analysis of the link between aid and economic improvement, finds that only humanitarian aid has a positive impact on per capita GDP.25

Much aid is, of course, targeted at improving health, nutrition, and education, as well as at such nondevelopmental objectives as disaster relief. Such interventions are primarily directed at welfare, particularly of the poor, although they also can have an important impact on growth. For example, the German and Irish governments’ funding for the Kalomo cash transfer program in Zambia was likely intended to reduce poverty and malnourishment, rather than to raise GDP directly.

Some researchers have looked at the impact of social sector aid on country progress in achieving the MDGs. Michaelowa and Weber find aid for education (both per capita and as a share of GDP) increases primary enrollment and completion rates.26 Dreher, Nunnenkamp, and Thiele find that increased per capita aid for education significantly increases primary school enrollment.27 Mishra and Newhouse, using a data set of 118 countries for 1973-20 04, find that doubling per capita health aid is associated with a 2 percent reduction in the infant mortality rate. Therefore, increasing per capita health aid from $1.60 to $3.20 will lead to roughly 1.5 fewer deaths per 1,000 births—a lift that is encouraging but small, relative to the MDG targets.28

These results show that not all aid is effective. Bourguignon and Sundberg point out the need to “open the black box” and better understand the relationship between aid and development outcomes.29 This can be done through analyses that focus on three basic relationships: the impact of policies on outcomes (knowledge, either ex post from impact evaluation or ex ante from modeling or economic reasoning), the influence of policy makers on policy, and the influence of external donors and international financial institutions on policy makers.

Myriad factors play on whether aid achieves its desired impact—or any positive impact. Some examples include the level of recipient-country ownership and the conditions imposed by donors, the predictability of future flows of aid, the investment climate of the recipient country, whether aid is tied, and the apparatus to monitor and evaluate progress. The changing aid architecture, which has new faces, new priorities, and a new structure, will play a major role in the next years.30 Aid quality, together with strong international coordination, will continue to be a focus to improve the delivery and effectiveness of aid and its impact on developing countries

Trade and the global economic recovery

In the aftermath of the recent financial crisis, trade has recently begun its path to recovery. Sustaining it will be critical. But many developing countries continue to face considerable challenges in reaching global markets as a result of limited or weak trade-related infrastructure and institutions, unfavorable business climates, limited access to trade finance, and protectionist restrictions. High and volatile food prices also create vulnerabilities, particularly for low-income countries with high shares of food imports and limited fiscal space.

After a brief review of the ongoing trade recovery, this section discusses the key challenges and opportunities to strengthen the international system and enhance the ability of developing countries—particularly the more vulnerable low-income countries—to benefit from greater trade integration. To maintain the recent momentum toward recovery, concerted efforts will be required to keep protectionist tendencies in check and to recommit to building a stronger and more effective multilateral trading system that serves developing countries through the conclusion of the Doha Round. It will be important to ensure that regional trade agreements, which can enhance market access, promote open regionalism. Also needed are measures to support access to trade finance and trade facilitation to connect vulnerable low-income countries, landlocked countries, and lagging regions to regional and international markets—and an expansion of aid for trade to ensure that the developing countries can implement such reforms and reap the gains of trade integration.

Trade remains crucial after the “great” trade collapse

World merchandise trade has recovered since early 2009, but it remains below precrisis levels (see figure 5.2). The world import value increased nearly 30 percent since its low point in February 2009, recovering at twice its growth rate during 2002-08. The recovery in trade is much faster among developing countries than among high-income countries. In the first 10 months of 2010, high-income-country export volumes grew at 10.4 percent a year, compared with 15.5 percent among developing countries. But the world import value remains 18 percent lower than the precrisis peak, even lower than if the world economy had continued to grow at the 1995-2008 trend. The pace of trade recovery is now decelerating, and the prospects are unclear. Although the global GDP growth projection for 2011 has been revised upward (by a quarter of a point to 4.4 percent) in anticipation of stronger growth in the United States, persistent high food prices threaten to undermine it.

FIGURE 5.2Exports have yet to recover their precrisis trend

Sources: Datastream; World Bank Development Prospects Group.

Trade bounced back in all developing regions (figure 5.3), driven by a vibrant rebound in emerging economies. By 2010, all developing regions recovered to their precri-sis export volumes, with East Asia and the Pacific and South Asia (especially China and India) leading this recovery. Export volumes in South Asia and East Asia and the Pacific peaked higher than precrisis levels. Trade volumes in the Middle East and North Africa also rebounded, but continue to be constrained by the sluggish growth in their main markets in the European Union. The downturn in exports in Europe and Central Asia turned a corner in August 2010, led by strong intraregional trade that saw the region more than recover its precrisis levels by the end of 2010. Exports in Latin America and the Caribbean remained lackluster, with sharp drops in October 2010 in Argentina and Chile as a result of strikes and disruptions in metal supply and weather-related agricultural shocks. Export growth in Africa has recovered from its trough during the crisis, but remains volatile. Globally, low-income countries have been insulated not only from the economic downturn, but also from the recovery, reflecting their lack of integration in the world economy. Their exports and imports, in both volume and value terms, remained comparatively flat during both the crisis and the postcrisis recovery.

FIGURE 5.3Merchandise export volume

Source: World Bank Development Economics Prospects Group data.

Benefits from global trade require continuing vigilance against protectionist tendencies

Given the importance of trade and investment for the global economic recovery, the G-20 commitment to resist all forms of protectionist measures, to keep markets open, and to liberalize trade and investment to promote economic progress for all is welcome. This commitment, reiterated during the November 2010 meeting in Seoul, Republic of Korea, has been a centerpiece of the G-20 response to the global economic crisis. It may have spared the world economy from falling into a 1930s Depression-era scenario.

The World Trade Organization (WTO) reports some progress in lifting protectionist measures imposed in the wake of the financial crisis (figure 5.4). The latest WTO Trade Policy Review (November 2010) indicates that 415 measures were reported by members between November 2009 and October 2010, down from 430 in the aftermath of the crisis between October 2008 and October 2009. Whereas more than three-quarters of the measures were trade restrictive in the first year, newly reported restrictive measures came down to two-thirds in the second year. Retrenchment in protectionism since the start of the crisis has nonetheless been slow, as only 15 percent of the restrictive measures introduced in 2008 have been terminated so far. Moreover, newly imposed export measures increased by 25 percent over the same period—primarily export bans and quotas on agricultural products partly resulting from higher food prices. According to WTO estimates, total import-restrictive measures introduced since the end of 2008 now account for about 1.9 percent of world imports.

FIGURE 5.4Trade-restrictive measures have fallen since 2008

Source: WTO Trade Policy Review OV 13.

G-20 countries remained the most active instigators of restrictive—and liberalizing—measures. About 60 percent of the trade-restrictive measures implemented between November 2009 and October 2010 were imposed by G-20 nations, led by BRICs (85 measures) with India at the head, followed by high-income OECD countries (35 measures). The United States had imposed the second-highest number of trade-restrictive measures in the year after the crisis but reported only four new restrictive measures in the last year. Whereas restrictions imposed in high-income OECD countries were mainly the result of trade remedy investigations—almost all antidumping initiations by the European Union—BRICs brought out both nontariff measures and trade remedy investigations. More detailed information on the number of WTO member–initiated temporary trade barrier investigations (antidumping, safeguards, and countervailing duty policies) from the World Bank’s Temporary Trade Barriers database indicates that their number has gone down since the third quarter of 2009 and is back to precrisis levels (figure 5.5). But overall estimates of the impact of these border and behind-the-border measures (including bailouts and subsidies) implemented since the crisis indicate that they contributed to an annual aggregate distortion to global trade of at least $35 billion.31

FIGURE 5.5Newly initiated trade remedy investigations have peaked

Source: World Bank Temporary Trade Barriers database.

The number of trade-liberalizing measures introduced in 2010 increased by 71 percent over those introduced in 2009. More than a third of the new measures were tariff reductions, introduced primarily by BRICs and lower-middle-income countries, such as Pakistan and Bolivia. Reductions in nontariff measures made up a quarter of all liberalizing measures, mainly from the BRICs. Despite global economic uncertainty, new measures to liberalize trade increased in 2010 (figure 5.6).

FIGURE 5.6Trade-restrictive and trade-liberalizing measures, November 2009-October 2010

Source: World Bank International Trade Department calculations based on WTO Trade Policy Review Overview Annex 1, November 2010.

Note: Of the 486 trade-related measures listed in the annex, 19 were unclassifiable because of insufficient information regarding their trade effect.

The LDCs are particularly harmed by G-20 protectionism. New analysis by the Global Trade Alert32 indicates that, since November 2008, 141 trade measures imposed by countries worldwide harmed the commercial interests of LDCs. Of these, about 100 measures (70 percent of those imposed) were introduced by G-20 members. Among the G-20, developing countries initiated 70 percent of the measures, led, in order, by India, Argentina, Indonesia, and Russia. Among LDCs, Bangladesh has been affected by the largest number of measures, followed by Tanzania, the Republic of Yemen, Senegal, and Sudan. These measures may significantly restrict LDC exports, particularly for some products they specialize in, thus contravening the undertaking at the G-20 summit.

High and volatile food prices are also creating vulnerabilities, particularly for low-income countries with high shares of food imports and limited fiscal space. Whereas individual governments can insulate themselves to some degree from increases in world prices by imposing export bans or making tactical reductions in import tariffs, these measures increase the volatility of world prices. Trade policy is generally not the appropriate instrument to achieve food security and rural development. High protection hurts households that are net consumers. Long-term solutions include, among other things, higher agricultural productivity to raise farmer incomes and lower consumer prices, liberalization around the world and commitment to multilateral trade rules, public access to information on the quality and quantity of grain stocks, and effective safety nets.33

Keeping markets open for LDC exports would help lift those countries out of poverty. Extending 100 percent duty-free, quota-free (DFQF) access to all exports of LDCs would promote new export opportunities for LDCs, particularly market access for products in which LDCs have a comparative advantage. Although trade preference programs provide high levels of product coverage, preferences are often underused and exclude products important to LDC exporters—for example, agricultural goods (for African exporters) and textiles, apparel, and footwear (for Asian exporters).

Extending DFQF from 97 percent to 100 percent could have a significant impact. Overall export gains for WTO-member LDCs could be on the order of $2 billion if G-20 OECD countries extended to 100 percent product coverage; this amount could be even larger if BRICs also offered full market access. For example, full DFQF access to all G-20 markets could increase Malawi’s GDP by some 10 percent; for Tanzania, the benefits of full DFQF granted by non-OECD G-20 countries are double those generated through DFQF enacted by only the OECD members. Given the size of the economies of low-income countries and the apparent complementarities with the G-20 countries, the additional imports are unlikely to pose undue costs or disruptions to G-20 markets.34 More comprehensive efforts to harmonize and coordinate trade preferences would also increase the overall effectiveness of trade preferences.

Concluding the Doha Round

The global financial crisis underlined the critical role of a multilateral, rules-based trade system. The WTO’s monitoring and reporting of trade measures during the crisis helped distinguish WTO-compatible policies from discriminatory policies, crucial to ensuring a transparent and fair trading system. It also certainly contributed to restraining governments from adopting more pervasive and numerous trade-restrictive policy measures to curtail the domestic impact of the crisis.

As unemployment rates rise despite the global economic recovery, governments should continue to ensure that benefits of an open multilateral trading system are not compromised by short-run pressures to protect domestic markets. Keeping markets open will also be paramount to countering the effects of the withdrawal of expansionary fiscal and monetary policies.

An effective and strong multilateral trading system remains critical for improving market access and accommodating new dynamics of trade. The structure of global production has undergone a major transformation, with global value chains much more prevalent and elaborate, involving more developing countries (including low-income countries). Although weak domestic policies, regulations, and institutions (particularly those increasing the cost of logistics) are the main binding constraint to progress, more gains may be achieved through a concerted, internationally integrated approach to reform, given the multilateral nature of vertical production chains.

Now is the right time to reach an agreement on Doha. Commissioned by a group of developed and developing economies, Peter Sutherland and Jagdish Bhagwati made the case for a deadline to complete the talks before the end of 2011, highlighting three prevailing conditions as opportune. First, higher commodity prices can dissipate resistance by farmers benefiting from subsidies. Second, the weak recovery enhances the attraction of a potential stimulus of approximately $360 billion on global trade. And, third, the new global trade dynamics need to be addressed.35 Consider the growth and rising complexity of global supply chains: they mean that today’s protectionists are more likely to resort to targeted rules than to tariffs, making trade negotiators’ traditional goal of dismantling tariffs less relevant.

The November 2010 G-20 meeting in Seoul and the Japan summit of the Asia-Pacific Economic Cooperation renewed hopes for progress in the Doha negotiations in the first half of 2011. G-20 and Asia-Pacific Economic Cooperation leaders saw a new window of opportunity to intensify negotiations in 2011, calling for multilateral cooperation to pursue a comprehensive and balanced trade agreement. WTO Director-General Pascal Lamy asked WTO ambassadors to engage in informal sessions with the goal of breaking longstanding stalemates (including sessions on the sidelines of the World Economic Forum Davos meeting in January 2011). He called the chairs of the negotiating committees for revised texts by late-April 2011 and urged WTO ambassadors to also pursue bilateral and small-group discussions to resolve key differences and catch up with work among the full membership on refining texts. Negotiations and consultations are scheduled to commence on all Doha topics—agriculture, nonagricultural market access, services, dispute settlement, facilitation, trade and environment, intellectual property rights, and the development agenda.

MAP 5.1Across the world, 884 million people lack access to safe water—around 80 percent of them in rural areas

Source: World Bank staff calculations based on data from the World Development Indicators database.

Locking in the Doha Round is also crucial so that the international community can address emerging issues beyond those existing in the Doha agenda.36 A fundamental shift is taking place in the world economy, but the multilateral trading system has not adapted. Mattoo and Subramanian point out that the world economy is moving broadly from conditions of relative abundance to relative scarcity, so economic security has become a paramount concern for consumers, workers, and ordinary citizens.37 Addressing these new concerns—relating to food, energy, and economic security—requires a wider agenda of multilateral cooperation involving not just the WTO but other multilateral institutions as well. Although these issues are growing in importance and require a multilateral approach, abandoning the present Doha negotiations in favor of an entirely new round of talks with a more up-to-date agenda, as some have advocated, has even less chance to get anywhere than has the Doha effort.

Building capacity to support deeper but open regional integration

Regional integration can complement multilateral liberalization. Regional trade agreements can mitigate potential adverse effects through parallel efforts to support unilateral liberalization or open access.38 Supporting the regional integration efforts of low-income countries through the promotion of trade facilitation and regional infrastructure could accelerate the pace of achievement for many MDGs. But regional trade agreements could be trade diverting and further complicate developing countries’ global integration prospects—for example, through complex rules of origin. Developing countries should be strategic about what is included in preferential trade agreements, be selective about which trading partners to include in such agreements and treaties, and avoid signing on to one-size-fits-all trade agreements that might not be suitable for their developmental stages.

In light of the growing number of preferential trade agreements, efforts should concentrate on building the capacity of trade negotiators from developing countries. With some 474 regional trade agreements notified to the WTO as of July 2010, regional integration has become an unavoidable feature of the international trading regime. More of these agreements included “deep regional integration” measures, involving regulatory and policy issues such as investment, intellectual property rights, environmental protection, technical and sanitary standards, migration and labor policies, and an array of other behind-the-border regulations. The breadth and coverage of deep regional integration is new for many developing countries. Negotiating and implementing such policies could be complicated and, without proper guidance and sufficient information, they could be tactically and commercially destructive. Many developing-country trade negotiators and government agencies may not have the legal or policy knowledge to strategically negotiate the appropriate regulatory components of regional agreements.

To provide more information about preferential trade agreements to developing countries and the international community, the World Bank recently launched a Web-based portal, the Global Preferential Trade Agreement Database,39 which provides real-time information on preferential trade agreements around the world (including agreements that have not been notified to the WTO). Designed to help trade policy makers, scholars, and business operators better understand and navigate the world of preferential trade agreements, the database was merged with the revamped Web-based World Integrated Trade Solutions, multiagency software providing access to trade-related data and integrated trade simulation tools.

A services “platform” could help fill in the information gap for services negotiations. Bringing together government agencies, regulators, and private sector stakeholders to discuss regulatory reforms related to services would improve policy makers’ expertise.40 Considering that services trade is paramount to the export strategies for many LDCs and that multilateral negotiations on further services liberalization and issues of labor mobility (beyond the General Agreement on Trade and Services) are inevitably tied to the eventual conclusion of the Doha Round, this would provide important information that developing countries need as they pursue services trade liberalization through unilateral reforms or regional and bilateral trade agreements.

As developing countries pursue regional integration, a better understanding of non-tariff measures (NTMs)—their prevalence, impact, and ways to streamline them—should be at the forefront of governments’ export competitiveness agenda. By definition, NTMs encompass a broad range of barriers, including quotas, import licensing systems and procedures, sanitary regulations, technical requirements, product standards, and labeling requirements. As a result of this broad definition, there is a lot of discretion in the application of NTMs, whether for legitimate policy objectives (health and consumer protection) or as protectionist measures. Poorly designed NTMs can also harm the competitiveness of developing countries by constraining the ability of companies to outsource key inputs, putting them at a competitive disadvantage on global markets. Enhancing transparency on the adoption and application of NTMs is thus crucial for developing countries as they aim to become more integrated with the global economy.

As a follow-up to the Multi-Agency Support Team’s work on NTMs that revised the NTM classification and collected data in a pilot phase, the World Bank, the International Trade Centre, and the United Nations Conference on Trade and Development have initiated data collection and dissemination efforts worldwide. As of December 2010, data had been collected in about 30 countries and should soon populate the World Integrated Trade Solutions database.41 Data collection and dissemination are accompanied by capacity-building programs at country and regional levels to improve the governance of NTMs, streamline them, and assess their impact on trade. More transparent information on NTMs should lead to more informed policy making for developing countries and facilitate the harmonization and streamlining of these measures.

To further increase the benefits of their preferential trade programs, developed countries should also consider simplifying the rules of origin pertaining to their preference programs. The estimated administrative cost for LDCs to comply with such rules is relatively high—in the range of 3-4 percent of the value of the goods traded. But because the majority of most-favored-nation tariffs in high-income countries are below this range, many LDCs choose not to use the preference margin. Harmonizing multilaterally would bring the administrative costs down. Those costs can also be reduced by adopting more trader-friendly approaches, such as allowing self-certification methods. The rules can be further eased by allowing less restrictive cumulation rules (such as diagonal or full cumulation), allowing duty drawback, and setting higher de minimis levels.42

Trade facilitation for LDCs, landlocked countries, and lagging regions

Exporters in many developing countries continue to face weak transport infrastructure and burdensome trade procedures. Landlocked LDCs, in particular, face unique infrastructure and institutional hurdles to overseas markets. For many landlocked LDCs, connecting to global supply chains is a formidable challenge caused by long distances from seaports and the need to cross borders. Landlocked countries tend to trade, on average, 30 percent less than coastal countries. Connecting landlocked LDCs to global supply chains could expand their employment, income, and consumption opportunities. With 20 of 54 low-income countries landlocked (mostly in Sub-Saharan Africa), trade facilitation that connects landlocked regions with international markets will open considerable economic opportunities (box 5.2). It could include streamlining transit regimes, implementing border and customs reform, improving transport service quality, and coordinating multimodal nodes within the supply chain. Limited competition on domestic routes is an explanatory factor behind the high prices charged for domestic shipments.43 So constraining monopoly power and removing barriers to entry and exit would lower costs for importers and exporters.

Box 5.2The donor community is enhancing Africa’s trade facilitation

The international community has reinforced its support to LDCs, especially in Africa. In addition to the Multi-Donor Trade Facility, the World Bank multidonor Trade Facilitation Facility, launched in July 2009, helps developing countries implement trade facilitation reforms and scale up trade-related infrastructure and institutions. As of June 2010, the facility was supporting 29 projects, with $20 million approved. Most projects are in Africa (Cameroon, Democratic Republic of Congo, Lesotho, Nigeria, Rwanda, South Africa, Togo, Zimbabwe, and regional projects with the Economic Community of West African States and the Economic Community of Central African States). The facility also has provided funding for regional transportation integration in East Asia and the Pacific, Europe and Central Asia, and Latin America. The aim is to provide initial funding to support technical advisory services and capacity building for project preparation that would later lead to concrete and measurable trade facilitation improvements. In addition, the facility supports the Doha negotiations by funding case studies to assess the implementation challenges of trade facilitation agreements for LDCs.

Logistical improvements can connect rural and remote areas within developing countries.44 Even with the sharper focus on connecting countries to trade corridors and supply chains, there is still a gaping divide between lagging areas in developing countries and better-connected leading areas. Moreover, logistics costs are exceptionally high because of poor logistics services and infrastructure, low economies of scale (transporting small consignments across long distances), and highly fragmented supply chains with numerous intermediaries exacting time and cost at each link. So producers and exporters in lagging areas do not reap the full benefits of trade. Policy actions should ensure better coordination and cooperation among producers within the supply chain and leverage public-private partnerships to improve transport infrastructure, to apply information technology, and to reduce the information asymmetry within supply chains (figure 5.7).

Trade facilitation through support to trade finance in low-income countries

The international community should continue to increase the availability of trade finance in developing countries—particularly low-income countries—to facilitate trade. Trade finance, which includes a range of financial instruments for trade transactions, underpins the financial infrastructure that enables countries and firms to trade with one another. The lack of trade finance can have severe implications for a pro-development global trading system. The issue of trade finance availability became especially relevant during the global financial crisis in 2008-09, when higher lending costs, higher risk premiums, and liquidity pressures caused by scarcity of capital led to a sudden shortage in trade finance.

MAP 5.2With half the people in developing regions without sanitation, the 2015 target appears to be out of reach

Source: World Bank staff calculations based on data from the World Development Indicators database.

FIGURE 5.7Local-to-global connectivity

Source:Kunaka 2010.

Lack of affordable trade finance has probably constrained the trade activities of small and medium enterprises (SMEs), particularly in low-income countries. Results from financial market and firm surveys (undertaken during the crisis by the IMF, the International Chamber of Commerce, and the World Bank to overcome the lack of data on trade finance) and postcrisis empirical analyses all indicate the prevalence of tighter trade finance conditions during the crisis and significant adverse effects on trade flows. The lack of data can hamper clear conclusions. Although survey results indicate that the shortfall in trade finance has contributed to the sharp drop in global trade flows during the crisis, it seems that it played a moderate role in one study.45 In manufacturing, where volumes fell but prices actually rose postcrisis, the evidence is consistent with a negative supply shock that might be associated with credit constraints.46 The trade collapse was mostly a result of the spillover of the financial crisis to the real economy and lower activity and inventory destocking. Nevertheless, the lack of affordable trade finance likely constrained trading activities of SMEs, especially those based in low-income countries that have underdeveloped financial systems and banks that could not fulfill the counterparty criteria of overseas banks. Postcrisis surveys and data on trade finance indicate signs of improvement.

The institutional response in providing trade finance during the crisis was timely and substantial. In the midst of the crisis, the international community responded swiftly—spearheaded by the G-20—in committing $250 billion over the course of two years in funding for cofinancing arrangements that support trade transactions. This was implemented through a partnership between development banks, export credit agencies, foreign commercial banks, private insurance underwriters, and investment funds. Whereas the G-20 support was mainly directed at large banks and international banking institutions, the World Bank’s International Finance Corporation (IFC) and the regional development banks stepped in as well to target their efforts at smaller banks and banks in developing countries. With the continued uncertainty in trade finance markets, particularly for low-income countries and small firms, governments and international organizations need to be cautious of the timing and pace of withdrawal of such trade finance programs.

Despite recent positive developments, concerns about trade finance have not completely dissipated. At the Seoul G-20 meeting in November 2010, the international community expressed particular concern about low-income countries that may still be facing severe difficulties in accessing trade finance at affordable cost. These concerns are exacerbated by the lack of available data for trade finance, which has constrained the ability to properly monitor and evaluate existing trade finance flows and to measure their impact on trade flows during and after the crisis. The building up of the Trade Registry by the International Chamber of Commerce is a significant step forward because it will create a living database of the trade finance market and may help demonstrate the resilience of the trade finance business.

Other concerns relate to the new Basel regulations, which are viewed as potentially constraining the supply of trade finance. Banks argue that the increase in the new liquidity and capital prudential requirements, and the nonrecognition of trade assets as a highly liquid and safe asset, would lead to a significant increase in banks’ cost in providing trade finance—a situation that will lead to lower supply, higher prices, or both. Regulators have insisted that the Basel II and III increase in capital for trade finance exposures is not any greater than for other exposures. In light of these different views, the Basel Committee established a working group to study the impact of regulations on trade finance. At the request of the World Bank and the WTO, the G-20 will take stock of the situation at its 2011 meeting.

Renewed support for effective aid for trade

The G-20 has renewed its commitment to support LDC trade capacity building through aid for trade. At the November 2010 Seoul meeting, the G-20 pledged to maintain aid for trade commitments in 2011 and beyond, despite fiscal and budgetary constraints. Launched at the G-8 meeting in Gleneagles and the follow-on WTO Ministerial Conference in Hong Kong SAR, China, in 2005, aid for trade aims to facilitate the integration of developing countries (particularly the LDCs) into the global economy by lowering cumbersome trade barriers, reducing transaction costs, and enhancing trade competitiveness. Aid for trade remains an effective way to support LDCs to improve supply-side capacities and reap the benefits of increased market access.47

After a sharp increase in donor aid for trade commitments in 2007 and 2008, the latest OECD data indicate that new commitments in 2009 plateaued at $39.5 billion (2008 constant prices). In 2009, the World Bank’s concessional arm, IDA, was the largest provider of aid for trade, accounting for about 21 percent of the total. Japan and the United States were the largest bilateral donors, providing 14 percent and 12 percent of total aid for trade, respectively. Africa was, for the first time, the largest recipient of aid for trade (41 percent); and the level of commitments increased over those of 2008. Aid for trade in Africa was mainly directed to Nigeria, Uganda, Kenya, and Ethiopia. Asia was the second-largest recipient of aid for trade (39 percent), with Vietnam, India, and Afghanistan the major recipients. Aid for trade mainly supported projects involving trade infrastructure and capacity building (particularly trade development programs), while technical assistance for institutional capacity building and training for trade regulations have been on the decline (figure 5.8).

FIGURE 5.8Regional trends in aid for trade, 2002-09

Source: OECD, Aid for Trade Statistical Queries 2010, http://www.oecd.org/document/21/0,3746,en_2649_34665_43230357_1_1_1_1,00.html.

Besides concerted efforts to channel aid for trade to developing countries, the international community is exploring the effectiveness of aid for trade. At the initiative of the WTO and the OECD, donors are currently collecting case studies that illustrate the impact of trade-related assistance and lending programs and the lessons learned from these projects. These case studies will be discussed at the July 2011 WTO/OECD Aid for Trade meeting. Moreover, with the emergence of a multipolar world with rising economic powers and multinational private sector firms, the quality of delivery of aid for trade has become more critical. This new paradigm calls for more public-private partnerships to strengthen trade capacity-building assistance delivered to LDCs. The IFIs can focus more on leveraging partnerships between government agencies and private sector firms. By combining the policy experience of the government and the ingenuity of the private sector, trade development projects may have the potential to be more far-reaching and effective. A good illustration of such programs is the deployment of modern information and communications technologies from the private sector to streamline trade facilitation and minimize at-the-border barriers.

International financial institutions’ support for development

The IFIs are adapting their policies, procedures, and tools to country heterogeneous circumstances and needs.48 They strive to provide all member-countries with development solutions appropriate to meet their development needs and capacity by using a mix of lending policies, financial facilities, and knowledge services, and by supporting the global public goods agenda. Moreover, the financial crisis, and the food and fuels crisis preceding it, have shown the crucial role of IFIs in supporting responses to crises and development emergencies, swiftly shifting toward a more countercyclical approach to mitigate social and economic impacts of the crises.

The response to recent crises provided a snapshot of the untapped potential of the IFIs to address the challenges and opportunities of the postcrisis world. It also provided a glimpse of how transformed IFIs will work on an ongoing rather than emergency basis. In recognition of the changing development landscape and country development needs, the IFIs have embarked on comprehensive modernization agendas involving actions and reforms to enhance financial capacity, transform governance, reform organization, and refresh and refine their priorities. Efforts to bolster their performance, ensuring relevance and results focus on country strategies and operations in the postcrisis world (including helping countries develop their own capacity to manage for results) are key objectives of the ongoing reform agendas and the driving force in the development of the results-based approaches that will guide IFIs’ actions in the future.

The evolution of assistance policies and resources

Given developing countries’ diverse needs and heterogeneous characteristics, the approach of the multilateral development banks (MDBs) has increasingly been tailored to country conditions and grounded in national strategies setting out countries’ development visions, objectives, and priorities.49 All of the major MDBs now formulate country strategy documents, generally, every two to four years, with more frequent progress reports and independent evaluations. At the World Bank, the Country Assistance Strategy has evolved over the past decade to adopt an explicit results framework that specifies the expected links between the World Bank’s interventions and long-term development goals, along with measurable indicators to monitor results.50

Donors have stepped up financial resources to low-income countries through the MDBs’ affiliates that provide grants and no- (or low-) interest credits. Disbursements by the World Bank’s IDA, the African Development Fund, the Asian Development Fund, the Inter-American Development Bank (IADB)’s Fund for Special Operations, and the European Bank for Reconstruction and Development (EBRD)’s Early Transition Countries Initiative (under which the EBRD accepts higher risks in projects in low-income members) have steadily risen over the years. Strong pledges from both traditional and new donors in the last IDA replenishment recognize that restoring momentum to the MDGs leading to 2015 requires ambitious efforts to deliver on the economic growth and access agenda for basic services (health, education, and basic infrastructure). A total of 51 donors endorsed a $49.3 billion funding package for the next cycle of IDA (IDA16, which covers July 2011 to June 2014), an increase of 18 percent from the previous round. At the African Development Bank (AfDB), the level of concessional aid resources was similarly maintained as a reflection of donor commitment to the achievement of MDGs by 2015. This commitment was similarly demonstrated during the 12th General Replenishment of the African Development Fund, whereby negotiations with 27 donor countries resulted in a 10.6 percent increase from the previous replenishment cycle and a funding package of approximately $9.5 billion to support the fund’s work in low-income countries in Africa between January 2011 and December 2013. MDBs’ operational and financial approach to address specific challenges or vulnerabilities has evolved and expanded over the last decade. For instance, the World Bank has enhanced its financial support to provide increased access to highly concessional resources for small IDA countries. Two measures were agreed to strengthen IDA support for small states during the IDA16 period: first, to eliminate the maximum per capita allocation ceiling, currently set at special drawing right (SDR) 19.8, which has constrained the allocations of several small states; and, second, to raise the base allocation for small states from SDR1.5 million to SDR3.0 million per year. This second measure would result in a substantial increase of IDA resources for small states with small populations.

IDA also has continued its efforts to help countries recover from natural disasters. Following the 2009 tsunami, IDA was able to provide significant additional resources to both Samoa and Tonga. Following the earthquake in Haiti, the World Bank pledged $479 million toward Haiti’s reconstruction for the first 24 months after the earthquake, two-thirds of which was delivered in the first 12 months. The portfolio in Haiti was restructured toward meeting pressing post-earthquake priorities; and, by end-2010, the WBG had provided $340.0 million to Haiti, including $139.5 in new grants, $129.0 million in disbursements, debt cancellation of $39.0 million (May 2010), and investments of $32.5 million from the IFC (box 5.3). Similarly, the IMF established a Post-Catastrophe Debt Relief Trust that allows the fund to join international debt relief efforts for very poor countries hit by the most catastrophic of natural disasters. Such debt relief is intended to free up additional resources to meet exceptional balance-of-payments needs created by the disaster and the recovery, complementing fresh donor financing and the fund’s concessional liquidity support. The Post-Catastrophe Debt Relief Trust Fund provided timely assistance to Haiti equivalent to around $268 million in fund-financed debt stock relief, eliminating Haiti’s entire outstanding debt to the IMF. This decision adds to the $1.2 billion of debt relief delivered to Haiti by the IMF and other financial organizations in June 2009, under the Heavily Indebted Poor Countries and Multilateral Debt Relief initiatives.

BOX 5.3Special reconstruction allocation for Haiti

The earthquake that struck Haiti on January 12, 2010, was a human tragedy. More than 230,000 people perished, 300,000 more were wounded, and well more than a million were displaced. The earthquake ravaged cities including Port-au-Prince, the capital, destroying whole neighborhoods, wiping away roads, collapsing public buildings, and damaging businesses. The disaster struck the country’s political, economic, and administrative nerve center, where an estimated 65 percent of GDP and 85 percent of government revenues were generated. A year later, conditions remain difficult for the Haitian population. About 1 million people continue to live in tent camps and depend on aid organizations for water, food, sanitation, health, and education services. Furthermore, on October 21, 2010, an outbreak of cholera was confirmed. The latest United Nations data indicate that about 149,000 cases have been reported and more than 3,000 people have died.

International response. Innumerable public and private organizations were mobilized in an unprecedented outpouring of international support after the earthquake. At the International Conference on Haiti in March 2010, $9 billion was pledged ($5.3 billion of which was for 2010-11 to support the Government Action Plan for Reconstruction and National Development. At the end of 2010, the international community had delivered more than half of its pledge for the first 24 months: $1 billion in debt relief had been provided and $2.7 billion approved for projects and programs, with $1.2 billion of these funds spent.

Haiti Reconstruction Fund. At the request of the government of Haiti, in April 2010, the World Bank set up the Haiti Reconstruction Fund (HRF), a multi-donor trust fund. The World Bank serves as a trustee for the HRF. In March 2010, donors pledged more than $500 million to the fund. To date, 12 donors have confirmed their pledges for a total of $267 million, all of which has been received. Since June 2010, the HRF has allocated $193 million for reconstruction.

WBG support. The World Bank Group pledged $479 million toward Haiti’s reconstruction for the first 24 months after the earthquake, two thirds of which was delivered in the first 12 months. The portfolio in Haiti was restructured toward meeting pressing post-earthquake priorities; and, by end-2010 the WBG had provided $340.0 million to Haiti, including $139.5 in new grants, $129.0 million in disbursements, debt cancellation of $39.0 million (May 2010), and investments of $32.5 million from the IFC.

WBG disbursements and debt relief. The World Bank portfolio currently includes 16 active projects for a total of $337 million. The Bank has also provided $42.5 million in budget support to the government of Haiti since January 2010. IDA, the Bank’s fund for the poorest countries, has disbursed more than $11 million a month, on average, since the earthquake. Following the earthquake, the Haiti portfolio was restructured to direct resources toward urgent post-earthquake priorities through the reallocation of funds and the modification of activities to adapt to institutional capacity changes. In May 2010, the Bank was able to cancel Haiti’s remaining $39 million debt to IDA, thanks to contributions by IDA.

New WBG programs. In early 2011, the WBG will launch the following programs and projects from newly approved resources: $95 million for a neighborhood upgrading and housing reconstruction program financed by IDA and the HRF; $15 million for an emergency cholera project; $11 million for a line item budget support operation to cover specific expenditures in education and agriculture; and $3 million to establish a $35 million Partial Risk Guarantee Fund for private operators in Haiti, cofinanced by the Inter-American Development Bank (IADB), the U.S. Treasury, and the HRF.

Support for the private sector. Since the earthquake, the WBG’s IFC has approved five projects for a total of $49.6 million. Three of these projects (worth $15.3 million) in the garments, hotels, energy, and mining industries, are already under implementation, in addition to a trade finance guarantee facility, an equity investment in a local bank to expand access to finance to SMEs, and a 30-megawatt energy project approved prior to the quake. IFC advisory services also ramped up operations to foster a better investment climate, improve access to finance, and develop management skills for more than 600 small entrepreneurs. The IFC’s combined investment and advisory projects are supporting the creation of 5,000 new jobs and safeguarding 5,000 existing jobs. The IFC also completed the structuring of the international bidding process for TELECO, which is bringing the country’s largest foreign direct investment since the earthquake—a $100 million investment by Vietnam’s biggest mobile telephone operator, Viettel—to expand telecommunications services in Haiti.

The approach to address the specific challenges of fragile and conflict-affected countries has also increasingly evolved over the last decade. In terms of resources, eligible postconflict and reengaging countries receive exceptional allocations, and some have benefited from exceptional pre-arrears clearance grants and allocations to help clear arrears. The IDA phase-out period for exceptional allocations, for instance, was increased from 3 to 6 years, resulting in 10 years of support for postconflict countries, which otherwise would have exited the window during IDA15. For the IDA16 period, postconflict countries will also be eligible for an extension of their phase-out period on a case-by-case basis, provided that they meet a predetermined set of criteria. Fragile and conflict-affected countries have also benefited significantly from policies on debt relief (through the joint World Bank-IMF Heavily Indebted Poor Countries and Multilateral Debt Relief initiatives) and from grants allocated through IDA’s grant allocation framework to help them avoid the reemergence of debt problems.

Although all fragile states are characterized by weak policies and institutions, country context varies considerably and operational approaches must be carefully calibrated to take this into account. The World Bank will incorporate the lessons of the 2011 World Development Report (box 5.4)—a report focused on conflict, security, and development challenges in fragile and conflict-affected countries—into the revision of its policies. Moreover, the World Bank committed in the IDA16 replenishment to develop plans to enhance the implementation of United Nations-World Bank partnership agreements, evaluate IDA’s work in fragile and conflict-affected countries during 2012-13, strengthen collaboration with partners on multidonor trust funds administered by the World Bank, and revise the postconflict performance indicators and publicly disclose them before the start of IDA16.

BOX 5.4World Development Report 2011: Conflict, Security, and Development

Repeated cycles of political and criminal violence have left more than 440 million people in poverty. Strengthening the institutions that provide justice, jobs, and citizen security is crucial to break these cycles. Restoring confidence and transforming security, justice, and economic institutions is possible within a generation. But that requires determined national leadership and an international system “refitted” to address 21st-century risks of violence: refocusing assistance on preventing criminal and political violence, reforming the procedures of international agencies, and renewing cooperative efforts between lower-, middle-, and higher-income countries.

Why do some parts of the world face repeated cycles of violence? Violence can be spurred by a range of internal and external stresses—infiltration of trafficking networks and foreign fighting forces; youth unemployment; economic shocks; and tensions between ethnic, regional, or religious groups. But other areas of the world, including some very poor countries, have managed and contained similar pressures. The common “missing factor” explaining repeated cycles of violence is that state and societal institutions are too weak to manage high internal and external stresses. States or subnational governments do not provide protection and access to justice. Markets do not provide legal employment opportunities. And communities have lost the social cohesion to contain conflict.

What works in breaking repeated cycles of violence? The key differences between situations of violence and stable developing environments are the need to restore confidence before undertaking wider institutional reforms; the priority given to basic institutional functions of security, justice, and provision of employment; and the role of regional and international action to contain external stresses. Pragmatic, responsive, and accountable leadership at national and local levels also plays a crucial role.

What policy tools make a difference, and how can they be adapted to country circumstances? The programs listed in the table on the next page have been used successfully in different country circumstances. Few countries have combined all of them, and most have faced challenges at some point either on fast confidence-building or on longer-term institutional transformation. The toolbox presented here thus provides a mechanism to learn from both successes and failures.

A policy toolbox
ToolsPolitics and justiceSecurityJobs and servicess
Restoring and buildingPolitical action to build nationalMilitary and policeMultisectoral community
confidenceand international stakeholderdoctrine and planningprograms, combining security
support and manage expectations:adapted to citizenoperations with action on
Forming inclusive-enoughstrategic communications,security goalsemployment, local justice,
coalitionsappointments, decision-makinginfrastructure, education, and
processesDesigned to delivercommunity empowerment
Delivering early resultsbenefits in ease of
Policy decisions and realisticproduction, trade,Regulatory simplification and
timelines to political reform,workplace attendance,recovery of basic infrastructure
decentralization, and transitionalaccess to services,and transit facilities to remove
justice where relevanthuman rights principles,bottlenecks to private sector job
and simple mechanismscreation
Extended reach andto redress citizen
responsiveness of local justicecomplaintsHumanitarian delivery to support
servicesimprovements in intercommunity
and state-community relations
All areas: transparency and willingness to consider independent monitoring by independent or
multisectoral government agencies to lock in the credibility of changes
TransformingJustice sector reform: focus onSecurity sector reform:Employment policy: mix of long-
institutionsbasic functions and use of state-capacity increases linkedterm public programs at the
community and state-traditionalto repeated realisticcommunity level, employability
Prioritizing andsystems for justiceperformance outcomes;programs, value chain approaches,
sequencing institutionalvetting and civilianinfrastructure, informal sector
reform to underpinPhased anticorruption measures tooversightsupport, and labor migration
security, justice, and jobsfirst show that national resourcesagreements
can be used for the public good;Traditional low-capital
Taking pragmaticthen to combat grand corruption;systems for rural andTemporary options for second-
approaches—first-bestand then to roll back minorcommunity policingbest service delivery: high service
in the political context,corruptioncoverage, high unit cost, under
second-best in technicalphase-out agreements; planned
termstransitions from international
humanitarian support
Global and regionalPlatforms to coordinate supply-Supplementary capacityPooled supplementary
approaches for externaland demand-side responsesand over-the-horizonadministrative capacity
stresses that nationalbetween producing andguarantees
actors can initiateconsuming countriesCross-border development
programming
Joint investigations and
prosecutions across jurisdictions
Source: World Bank 2011.
Source: World Bank 2011.

Like IDA’s special assistance, the African Development Fund’s postconflict enhancement factor enables countries to benefit from additional resources beyond their performance-based allocation for a limited period after they are designated postconflict countries. The AfDB has established the Post-Conflict Country Facility to help countries emerging from conflict clear these arrears on their debt. Similarly, the ADB has deployed innovative means to strengthen the effectiveness of country-led models of engagement in the complex environments of fragile and conflict-affected situations. In particular, ADB has sought to sustain its commitments for longer periods; partner closely with other funding agencies; and pursue deeper, more flexible, and longer engagements in capacity and institutional development. The IADB used special measures for its engagement in Haiti—including simplified startup requirements, broader eligible expenditure categories, and elimination of counterpart financing requirements. In 2004, the EBRD launched the Early Transition Countries Initiative to increase its impact in the region’s lowest-income and least-advanced transition coun-tries51 by developing specific financial facilities targeted at local enterprises, including the separate facilities to fund equity investments, directly finance long-term loans, cofinance loans with local commercial banks, and lend to microfinance institutions.

Development finance

Over the years, the MDBs have expanded the range of their instruments and modernized them to make them more responsive, results oriented, and amenable to an enhanced business model and country needs. For example, important refinements to the development policy lending (DPL) instrument were made at the World Bank immediately prior to and during the crisis. First, the World Bank adopted enhancements for DPL with a deferred drawdown option (DDO) that allows International Bank for Reconstruction and Development (IBRD) borrowers to postpone disbursement of a loan for a defined period, instead of drawing down funds immediately after approval. Second, the World Bank introduced a DPL instrument that provides liquidity immediately after a natural disaster (the CAT DDO) to support a disaster risk management program, assuming a state of emergency is declared. And, third, the Bank adopted reforms for the Special DPL, available to countries that are approaching or are in a macroeconomic crisis, contingent on a disbursing IMF program being in place. Since April 2008, the board has approved 12 DPL DDOs for a total of $5.6 billion, and $4.8 billion of that amount had been disbursed by the middle of fiscal 2011. Several CAT DDOs for countries vulnerable to natural catastrophes have since been approved, totaling $400 million. Moreover, in recognition of the vulnerabilities that low-income countries face in terms of both financial crises and natural disasters, the World Bank and the IDA deputies have recently agreed to establish a dedicated Crisis Response Window (CRW) within IDA to enhance its capacity to respond to crises. The CRW will provide IDA countries with timely access to additional resources to respond to the impact of severe economic crises or natural disasters; and it will strengthen IDA’s capacity to respond rapidly to such crises in collaboration with other agencies, development banks, and donors. Resources for the CRW have been capped at 5 percent of total IDA16 resources, and an amount of SDR1,335 million has been set aside to finance expenditures under the CRW.

Finally, a major effort is also under way to reform the World Bank’s investment lending model to focus on results and risks, with the goal of improving its responsiveness to borrowers’ needs and to a changing global environment.52 Guarantees are currently one of three development finance instruments (along with DPLs and investment lending) that the World Bank offers, and a number of actions are being put in place to improve the attractiveness of the guarantee product and encourage country teams and client governments to actively consider guarantee operations.

Similarly, the ADB has introduced new and innovative instruments to finance large individual projects and longer-term investment programs. The following instruments expand the options available in ADB’s development finance portfolio while preserving its credit standing: Multitranche Financing Facility, which allows the ADB to finance a long-term investment program based on a sector assessment (road map) and organized in a series of funding blocks, or tranches; Nonsover-eign Public Sector Financing Facility, which provides debt finance (loans and guarantees) directly to selected nonsovereign public sector entities without a central government (sovereign) guarantee; Local Currency Loan Product, which allows the ADB to offer loans denominated in a local currency to reduce the mismatch between income received in a domestic currency and debt repayments in a foreign currency; and new forms of cofinanc-ing through active financial syndications and risk sharing with commercial financing partners that have since been mainstreamed into the ADB’s operations.53

The global financial crisis undoubtedly also had a lasting effect on the AfDB’s lending. In March 2009, the AfDB’s board endorsed four initiatives aimed at better responding to the needs of its client countries: an Emergency Liquidity Facility to assist eligible AfDB regional member-countries and nonsovereign operations suffering from lack of liquidity ($1.5 billion); a Trade Finance Initiative ($1 billion) that comprises a line of credit ($500 million) and a Global Trade Liquidity Program ($500 million) to allow eligible African commercial banks to support trade finance operations; an accelerated replenishment process for the 12th General Replenishment of the African Development Fund; and enhanced Policy Advisory Support to support countries where advisory capacity remains challenging.

The EBRD has also expanded the existing pool of financial instruments available to the private sector in its countries of operation. This includes the introduction of various facilities and frameworks aimed at different aspects of private sector development—regional energy efficiency, direct mid-size lending, and regional micro, small, and medium enterprises lending. The crisis response packages introduced in 2008 are good examples of the EBRD’s reaction to the changing economic environment in its countries of operation.54 Similarly, the IFC also undertook new initiatives to support private sector activities in the wake of the crisis by providing liquidity support, rebuilding financial infrastructure and mobilizing investment in distressed asset pools, and providing advisory services to enhance the efficiency of distressed asset markets.55

Knowledge services

The IFIs are also increasingly providing more flexible and ad hoc analysis, research, global public goods in the form of databases and free data, advice, and technical assistance. In low-income countries and some lower-middle-income countries, knowledge services are often bundled with lending, which is seen as a tool of public policy for designing and implementing reform/knowledge agendas. More sophisticated middle-income countries are mainly interested in obtaining stand-alone knowledge support in cutting-edge areas. Between these two extremes, there is a variety of hybrid requests that are accommodated by an increased flexibility in the delivery modalities. For instance, the EBRD’s unique mandate of fostering transition toward open market-oriented economies has shaped its specific role in knowledge services. Technical cooperation provided to clients (including through donor programs) is aimed at different “transition-oriented” aspects of an operation, such as development of management skills, legal advice to promote regulatory development and improve legislation and corporate governance, and skills transfer. Another example of knowledge services is the EBRD’s Turn Around Management and Business Advisory Services programs, which have been valuable instruments for the promotion of good management in the SME sector, providing consultancy advice at the enterprise level. Turn Around Management supports the introduction of international best practice SME enterprises, while the Business Advisory Services Program acts as a facilitator for the use of local, private sector consultants by micro, small, and medium enterprises to obtain a diverse array of services.

Increasingly, cutting-edge knowledge is generated in the South through the countries’ own development experiences. And as policy analysis and development research are increasingly conducted by countries themselves, the IFIs can play a vital role both as generators of research and as providers of a forum for bringing together knowledge from both the North and the South—acting as a global connector of practitioner knowledge, a broker of development, and a facilitator of capacity development and client learning. The World Bank, for instance, has established partnerships with researchers and analysts in developing countries: the China Center for Economic Research, the New Economic School in Moscow, the Economic Research Forum in Cairo, the Global Development Network in collaboration with 11 regional partners and headquartered in New Delhi, and others. A South-South Experience Exchange Facility has been set up to help developing countries share expertise.56 So far, that facility has received 88 proposals to support South-South activities in World Bank products and services in more than 40 countries.

As MDBs strengthen their role as providers of global public goods (such as data and research) and their role in linking country practitioners and policy makers to sources and centers of knowledge and innovation dispersed around the world, knowledge platforms that involve external stakeholders in coproducing knowledge have been set up to provide a framework for sustained global collaboration around selected strategically significant issues. For instance, the World Bank knowledge platform initiative focuses resources—both within the World Bank and across the development community—on strategic, and cross-sectoral transformational issues to fill critical knowledge gaps and seek cogeneration of knowledge from diverse sources and institutions. The first three knowledge platforms are becoming operational, and they focus on urbanization, the e-Transform Initiative (information and communications technology for accountability and development); and green development. The World Bank also is taking steps to improve access to its data and research (box 5.5).

Global programs and partnerships

The MDBs are stepping up their efforts to address common social sector and environmental challenges through global programs and partnerships. World Bank support for global programs began three decades ago, with the establishment of the Consultative Group on International Agricultural Research that was recently restructured. Global programs are now reflected in World Bank corporate strategy papers and operational activities, with more than 100 programs (managed by either the World Bank or external recipients). Recent initiatives include the World Bank’s role in the Climate Investment Funds, including the Clean Technology Fund and Special Climate Change Fund, which provide financing for projects to address climate change (box 5.6). The Pilot Program on Climate Resilience helps highly vulnerable countries integrate risk and resilience into core development planning; the Forest Investment Program supports efforts to reduce deforestation and forest degradation, cut emissions, and maintain carbon reservoirs; and the Scaling Up Renewable Energy Program aims to demonstrate low-carbon energy development in low-income countries.

The regional banks are also involved in global and regional programs covering financial stability, trade, environment, post-conflict assistance, and knowledge; and all but the EBRD are involved in the control of infectious diseases. In many cases, the banks are focused on regional public goods (RPGs) or on regional aspects of global public goods, looking to the World Bank on the global aspects. They also are involved in helping their regional clients build country capacity to meet requirements under global agreements. For the AfDB, critical issues are postconflict assistance and health, especially in the face of the HIV/AIDS epidemic. For the ADB, key issues are the environment, health, and knowledge, with a particular focus on those issues where there are spillover effects within the region or within the ADB’s subregional coverage. For the EBRD, nuclear safety is an area of special focus, where the World Bank has the international lead in supporting transition countries in decommissioning capacity and resolving other environmental liabilities from the Soviet era. Another focus area is financial stability, especially the adoption of the standards and codes underpinning market economies. The IADB has five priority areas in the provision of regional and global public goods—financial sector assessments, regional integration, curbing of infectious diseases, promotion of environmental services, and support for research in agriculture and regional policy dialogue. It has prepared a new policy framework for its support for RPGs, including a financing facility geared to providing grant financing for what it calls “early-stage RPGs” (where dialogue among countries is needed), “later-stage RPGs” (where larger institutional resources to manage the emerging program are needed), and the initial stages of “club RPGs” (which will likely be financially self-sustaining once they are up and running).

BOX 5.5Open data, open knowledge, and open solutions

User expectations for public information are changing rapidly; and clients and other stakeholders expect easy access to World Bank-generated data, knowledge, and solutions. Open access is meant to increase the development impact of the World Bank’s information. Three areas are receiving top priority:

  • Open data—In April 2010, the World Bank released its development data free of charge. The Open Data work builds on the success of this initiative. Its priorities are to expand the Web site and create a data resource center to serve as a clearinghouse for researchers, to develop new applications to enable easy access to data across platforms and devices, and to strengthen capacity-building activities in developing countries to help ensure the quality of data.
  • Open knowledge—With a shift in the focus of research teams, there is now an emphasis on four strategic themes: economic transformations around emerging issues, such as macroeconomic growth, agriculture, and rural development, urbanization, and green development; the broadening of opportunities by trade and integration and access to finance; the understanding of risk and vulnerability across countries and sectors; and the measuring of results and aid effectiveness.
  • Open solutions—To engage in the “wholesaling of research,” the World Bank plans a greater focus on the creation of software tools, training products, and researcher communities. Significant efforts are under way to improve and to broaden the focus of such existing tools as ADePT and iSimulate. The programs are expected to be collaborative efforts within the World Bank and with technology partners (such as Google and Microsoft) and multilateral organizations (such as the United Nations and the IMF).

The regional development banks are also stepping up their efforts to promote regional cooperation and integration. The AfDB supports the New Partnership for Africa’s Development Secretariat, the African Union, the Global Environment Facility (especially on the development of the Environmental Action Plan for Africa), and the Africa Regional Coordination Unit for the United Nations Convention to Combat Desertification. In Asia, the Greater Mekong Subregion Program has long been a prominent area of ADB support, promoting cross-country cooperation in a number of sectors through investments in infrastructure, policy initiatives, and institutional mechanisms. Other regional programs cover the Pacific Islands, Central Asian regional economic cooperation, South Asian subregional economic cooperation, and the Association of Southeast Asian Nations. Similarly, the IADB works very closely with regional associations in Central and South America and the Caribbean.

BOX 5.6Climate change, natural disasters, and the World Bank Group

To address the threat of climate change, development needs to become “climate smart.” It must deal with adaptation efficiently and mitigate the growth of greenhouse gases. This will require additional resources, beyond existing development finance. Synergies between climate-related investment and development need to be fully exploited. Adaptation programs can be pro-poor, such as converting degraded cropland into resilient agroforestry systems.

The WBG is helping countries address climate change through projects and partnerships. A key partnership is the Climate Investment Funds (established in 2008) to which contributing countries have pledged more than $6 billion for climate-resilient and low-emissions development. It is a partnership among the MDBs through which developed and developing countries come together with stakeholders. The World Bank plays a critical tripartite role—as trustee of the funds, as implementing agency, and as host of the administrative unit. More than 40 countries are currently undertaking Climate Investment Funds pilot programs. The Pilot Program on Climate Resilience helps highly vulnerable countries integrate risk and resilience into core development planning. The Forest Investment Program supports efforts to reduce deforestation and forest degradation, cut emissions, and maintain carbon reservoirs. Mitigation is addressed through the Clean Technology Fund, which supports scaled-up financing for low-carbon technologies in middle-income countries. The Scaling Up Renewable Energy Program aims to demonstrate low-carbon energy development in low-income countries.

The WBG also addresses climate change through Development Policy Operations, technical assistance, investment lending, and analytical work. Development Policy Operations provide support to governments implementing climate-related policies. In Ghana, for example, the Agriculture Development Policy Credit supports efforts to integrate climate risk management into agriculture-led growth. In Bangladesh, 320,000 homes have been provided with solar electricity, and thus with lighting for education and for women’s economic empowerment. The IFC is supporting climate-related investments that help meet the needs of the poor for modern services in an efficient manner, such as the Lighting Africa Program.

Natural disasters are another area where the WBG is increasingly focusing its attention. The Global Facility for Disaster Recovery and Reconstruction has established a Disaster Risk Financing and Insurance Program to enhance capacity building and knowledge sharing on disaster risk financing and to mainstream disaster risk financing and insurance into World Bank operations. New regional initiatives can build the Caribbean Catastrophe Risk Insurance Facility, which is in its fourth year of providing hurricane and/ or earthquake insurance to 16 Caribbean countries and territories. With reinsurance, it has the capacity to handle claims arising from a series of events having a statistical probability of occurring only once in 1,000 years without drawing more than $20 million of its own assets (which now exceed $100 million). The World Bank’s convening power is proving valuable to other pooling initiatives designed to reduce costs and achieve efficiencies in risk financing. In partnership with the ADB and regional partners, the Pacific Catastrophe Risk Assessment and Financing Initiative has been developing several disaster risk management applications: disaster risk financing solutions, including a regional insurance facility; disaster risk preparedness through identification of critical infrastructure; and disaster risk reduction through the identification of high-risk areas. Other similar new programs include the Catastrophe Risk Insurance Facility for Southeastern Europe and the Africa Risk Capacity, an effort to pool drought risk across the continent.

IFIs’ response to crises

The IMF has taken the lead in responding to crises by providing financial support to countries to permit orderly adjustment to payments crises. With the onset of the global financial crisis, the IMF moved quickly to establish new instruments to better assist its members—for example, a new Flexible Credit Line (FCL) to provide large and up-front financing to members with very strong fundamentals and policies. The facility can be used on a precautionary basis or for actual balance-of-payments needs. Because access to the FCL is restricted to those countries that meet strict qualification criteria, drawings under it are not tied to ex post conditionality. Countries that do not qualify for the FCL may receive financial assistance under High Access Precautionary Stand-by Arrangements, which can be frontloaded and must take account of the strength of a country’s policies and the external environment. The Precautionary Credit Line (PCL) was introduced to meet the needs of countries that, despite having sound policies and fundamentals, have some remaining vulnerabilities that preclude them from using the FCL. Decisions have been made on a doubling of access levels, and conditionality has been reformed to make it more focused and tailored to country circumstances.

IMF actions were complemented by the MDBs. Much of the increase in MDB financing over the past two years took the form of budget support to quickly disburse funds to protect the most vulnerable people against the fallout of the crisis, to maintain planned infrastructure investment, and to sustain private sector–led economic growth and employment creation. The countercyclicality of the financial support provided during the crisis by the IFIs was particularly important, given that the overall aid levels stagnated in real terms.

The IFIs’ response was tailored to the gravity, speed, and center of attention of the event. The IMF has made commitments of more than $250 billion since mid-2008, and the MDBs had record commitments and disbursements in the same period. For instance, since July 2008 when the full force of the financial crisis began to hit, the WBG has committed more than $152 billion and disbursed more than $96 billion in loans, grants, equity investments, and guarantees in support of its clients. In fiscal 2010, the IBRD’s commitments of nonconcessional resources were $44.2 billion, up from a record high of $33 billion in 2009. Low-income countries have not had access to additional resources to the same extent as middle-income countries. IDA commitments in fiscal 2010 reached $14.5 billion, a 3.5 percent increase from 2009. Concessional funds from MDBs increased only slightly, given the fixed envelope of concessional windows. To accelerate their response to the crisis, however, the IFIs have boosted flows to the poorest countries by frontload-ing available resources. Finally, the support to private sector and nonsovereign has also been substantial. IFC investments increased by 21 percent in fiscal 2010, reaching $12.7 billion, with an additional $5.0 billion mobilized from other sources. Almost half went to IDA recipients—255 projects totaling $4.9 billion. Guarantees from the Multilateral Investment Guarantee Agency reached $1.5 billion, up from $1.4 billion in 2009.

The role of the IFIs, of course, extends beyond financing. Crucial roles for the IFIs in the context of the global economic crisis have been to inform policy making by analyzing the international spillovers of national policy actions and bringing out the interconnected nature of the challenges and to highlight the need to ensure that national responses are consistent with the global good. Amid rising pressures for policies to turn inward, the IFIs’ role in warning against the risks of trade protectionism and financial mercantilism is indispensable. Drawing policy lessons from the current crisis, especially but not only in financial regulation, will be another key area. The IMF has a particularly important role in enhanced surveillance of risk in the globalized financial markets.

As the recovery progresses, it is clear that the crisis has dramatically altered the development challenges facing low-income and middle-income countries, and hence those facing the international community. Managing the availability and allocation of resources will remain a challenge for the IFIs as the recovery proceeds. To this end, the IFIs’ shareholders increased the ability of the IFIs to cope with crises and address development needs through the increase in IMF resources and recent agreements on MDBs’ capital increases.

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1.OECD 2010.
3.Dang, Knack, and Rogers 2009. See also Mold et al. (2010).
4.They look at banking crises in 24 donor countries over 1977-2007. The data and the definition of “banking crisis” are based on Laeven and Valencia (2008).
5.Norway has spent 0.85 percent of its gross national income on official development assistance over the past half-century, followed by the Netherlands (0.79 percent), Sweden (0.77 percent), Denmark (0.77 percent), and Luxembourg (0.57 percent).
7.Ibid.
8.IPRCC 2010. See also Qi (2007).
12.World Bank 2010.
17.Publish What You Fund: The Global Campaign for Aid Transparency, http://www.publish whatyoufund.org/.
18.Statistical and technical problems include endogeneity, difficulty in determining the direction of causality or controlling for country-specific characteristics, multicollinearity, autocorrelation, and selection of instruments in the analysis (Roodman 2008).
21.Clemens, Radelet, and Bhavnani 2004. Shortimpact aid is defined as an aid disbursement funding an intervention that plausibly could increase growth within four years (balance-of-payments support, infrastructure finance).
23.Developmental aid comprises multilateral aid and aid from some bilateral donors, with relatively high aid quality; geopolitical aid is aid from other bilateral donors.
30.See, for example, Shafik (2007).
32.The Global Trade Alert database is available at http://www.globaltradealert.com.
34.Bouet et al. 2010.
38.This implies simultaneously cutting trade barriers to external members or allowing their participation within the rules envisaged under the agreement.
41.The World Integrated Trade Solution database is available at http://wits.worldbank.org/wits/.
42.Notes on some technical terms are as follows: “Rules of origin” determine whether an import shipment has “originated” in a preference-eligible exporting country and thus whether it qualifies for a reduced tariff rate. The rules may be specified according to the share of “value added” that originated in the preference-eligible country, or in other ways. “Cumulation” provisions allow intermediate inputs that originate in certain third countries (usually other preference-receiving countries) to count toward fulfilling the rule of origin, thus providing flexibility in sourcing inputs from low-cost providers. “De minimis” refers to rules permitting exemption from notification for state aid under certain thresholds to farmers, fishermen, and processing and marketing companies. See the WTO Web site (http://www.wto.org) for more discussion of various terms.
45.Chauffour and Malouche forthcoming.
47.See Hoekman and Wilson (2010) and OECD/ WTO (2010).
48.Our focus is on the five largest multilateral development banks—the African Development Bank (AfDB), the ADB, the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), and the World Bank—and the IMF.
49.For most low-income countries, the Poverty Reduction Strategy Paper (PRSP) is the vehicle used by the authorities to set out the national strategy. It serves as the foundation for the strategy. For middle-income countries, there is not an agreed format like the PRSP for setting out the national strategy, and the MDBs rely on a wide variety of country-specific vehicles as a basis for their country lending and nonlending programs.
50.Every Country Assistance Strategy since January 2005 is results based (following a successful pilot project during FY03/04).
51.The EBRD countries of operation within the Early Transition Countries Initiative are Armenia, Azerbaijan, Belarus, Georgia, Kyr-gyz Republic, Moldova, Mongolia, Tajikistan, Turkmenistan, and Uzbekistan.
52.World Bank 2009.
53.The ADB’s Trade Finance Program (TFP) provides guarantees and loans to partner banks in support of international trade. A substantial portion of the TFP’s portfolio supports small and medium-size enterprises, and many transactions occur either intrare-gionally or between developing member countries (DMCs). In March 2009, following the financial crisis and market needs, the TFP limit was increased to $1 billion and transaction tenor was extended to three years. The ADB established a $3 billion Countercyclical Support Facility in June 2009 to provide support to fiscal stimulus by middle-income countries. The facility helped these middle-income DMCs sustain critical development expenditures for fiscal stimulus to counter the adverse impacts of the global economic crisis during 2009–10. The facility is a short-term lending instrument and complements conventional program loans aimed at supporting structural reforms over an extended period. Its aim is to provide fast-disbursing crisis assistance to address short-term liquidity crunch and enhance DMCs’ capacity to provide fiscal stimulus.
54.The EBRD has stepped up its support for banks adversely affected by the crisis in the transition region by providing equity and debt finance that was otherwise unavailable on the financial market. The enterprise response package aims at meeting short-term refinancing needs and sustaining existing investment programs. The launch of the Corporate Support Facility ensured the provision of quick-disbursing financing to help companies weather the impact of the crisis and of opportunities to strengthen and extend transition impact through loan con-ditionality. The EBRD is virtually doubling its Trade Facilitation Programme (to a maximum of €1.5 billion), which plays a crucial role in keeping trade flowing to and from the region in times of severely restricted access to finance.
55.The IFC’s new initiatives focused on three main areas: (1) providing liquidity support through the expansion of the Global Trade Finance Program from $1 billion to $3 billion and creating the Global Trade Liquidity Pool, which was endorsed at the most recent G-20 summit in London to provide credits to support trade finance over the next three years; (2) launching the Infrastructure Crisis Facility to provide liquidity for infrastructure projects, creating the Microfinance Enhancement Facility in partnership with the German development bank, and rebuilding financial infrastructure by creating the Bank Capitalization Fund in which the IFC and the Japanese government have invested $1 and $2 billion, respectively, to provide additional capital for banks in developing countries; and (3) designing advisory programs in risk management and nonperforming-loans management and implementing a Distressed Asset Recovery Program that would mobilize investment into distressed asset pools and provide advisory services to enhance the efficiency of distressed asset markets.
56.It is envisaged that the initiative could help developing countries share expertise in areas such as managing commodity windfalls, developing efficient tax systems, adapting to new technologies, selecting public investment projects with high economic and social rates of return, reforming pensions, and creating social safety nets that benefit the poor.

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