35899 GLOBAL MONITORING REPORT 2006 GLOBAL MONITORING REPORT 2006 Millennium Development Goals: Strengthening MutualAccountability, Aid,Trade,and Governance © 2006 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org Cover design: Chris Lester, Rock Creek Creative, Bethesda, Maryland. Cover map: Map design unit of the World Bank, based on data provided by the staff of the Development Data Group of the World Bank's Development Economics Vice Presidency. 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ISBN-10: 0-8213-6477-4 ISBN-13: 978-0-8213-6477-2 eISBN: 0-8213-6483-9 DOI: 10.1596/978-0-8213-6477-2 Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii Millennium Development Goals (MDGs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Part I Monitoring Progress . . . . . . . . . . . . . . . . . . . . . . . 19 1 Charting and Sustaining Progress in Income Poverty Reduction . . . . . . . . 21 2 Managing Money for Human Development Results . . . . . . . . . . . . . . . . . 45 3 Delivering on Commitments for Aid, Debt Relief, and Trade . . . . . . . . . . 73 4 Strengthening the Performance of International Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Part II Governance as Part of Global Monitoring. . . . . . 121 5 Monitoring Developing-Country Governance. . . . . . . . . . . . . . . . . . . . . 123 6 Monitoring and Improving Governance Subsystems . . . . . . . . . . . . . . . . 139 7 Strengthening Global Checks and Balances. . . . . . . . . . . . . . . . . . . . . . . 177 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Statistical Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 v C O N T E N T S Boxes Millennium Development Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii 1 Global Monitoring Report 2006: six key messages. . . . . . . . . . . . . . . . . . . . 2 1.1 Lagging regions in middle-income countries and progress toward the MDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.2 Beyond improved investment climates and infrastructure. . . . . . . . . . . . . . 29 1.3 Improving the investment climate in South Africa . . . . . . . . . . . . . . . . . . . 31 1.4 The monitoring dilemma: matching the story of suppliers with the story of users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 1.5 Small-scale private service providers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 1.6 Building creditworthy borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.1 Education for All Fast-Track Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.2 Jump-starting progress on primary completion in Niger. . . . . . . . . . . . . . . 49 2.3 China's slow progress on child mortality . . . . . . . . . . . . . . . . . . . . . . . . . . 50 2.4 Global Alliance for Vaccines and Immunization . . . . . . . . . . . . . . . . . . . . . 51 2.5 A new global partnership for the health of mothers, newborns, and children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2.6 HIV prevention works when it is intensive and sustained. . . . . . . . . . . . . . 53 2.7 Global Fund to Fight AIDS, Tuberculosis, and Malaria . . . . . . . . . . . . . . . 54 3.1 Africa Action Plan: an opportunity to coordinate aid flows to Africa. . . . . 79 3.2 Measuring the "quality of aid". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 3.3 Macroeconomic management of surges in aid . . . . . . . . . . . . . . . . . . . . . . 86 3.4 The MDRI and "free-riding" risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 3.5 Estimating the impacts of global trade liberalization . . . . . . . . . . . . . . . . . 93 3.6 Africa and trade reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 4.1 The importance of governance in performance-based allocation formulas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 4.2 Conditions for evidence-based policy: lessons from the PRS experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 4.3 Independent quality review of analytical and advisory activities at the World Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 4.4 Third roundtable on managing for development results . . . . . . . . . . . . . . 111 4.5 Independent evaluation at the IFIs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 4.6 Safeguards assessments by the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 5.1 Governance and corruption are not the same thing . . . . . . . . . . . . . . . . . 124 5.2 The 2004 CPIA's 16 criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 5.3 Three aggregate governance Doing Business and Investment Climate Survey indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 6.1 Two IMF tools to support fiscal management and transparency. . . . . . . . 141 6.2 Recent advances in monitoring the quality of procurement . . . . . . . . . . . 144 6.3 Actionable indicators on public administrative quality. . . . . . . . . . . . . . . 149 vi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C O N T E N T S 6.4 Albania--administrative reform in an unpropitious environment. . . . . . . 152 6.5 Why stand-alone investment projects can be bad for governance . . . . . . . 157 6.6 Linking community-based resource transfers and decentralization in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 6.7 How media access can influence development outcomes . . . . . . . . . . . . . 162 6.8 The Poverty Reduction Strategy process in Rwanda and Vietnam . . . . . . 162 6.9 The Global Integrity Index as a tool for governance monitoring . . . . . . . 165 6.10 Strengthening justice--three initial lessons . . . . . . . . . . . . . . . . . . . . . . . . 167 6.11 Legislative oversight in Africa--a work in progress . . . . . . . . . . . . . . . . . 168 7.1 Kickbacks under the United Nations Oil-for-Food Program. . . . . . . . . . . 179 7.2 The Dominican Republic--AML in support of anticorruption. . . . . . . . . 180 7.3 Four pillars of the United Nations Convention Against Corruption . . . . . 182 7.4 International asset recovery--a complicated exercise . . . . . . . . . . . . . . . . 182 7.5 Civil versus criminal law pursuits of corruption . . . . . . . . . . . . . . . . . . . . 183 7.6 The African Peer Review Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 7.7 Improving governance in resource-rich countries . . . . . . . . . . . . . . . . . . . 185 Figures 1 Poverty headcount by region, 1990­2002, and forecasts to 2015. . . . . . . . . 3 2 Annual reduction in child mortality, 1997­2004 . . . . . . . . . . . . . . . . . . . . . 5 3 ODA increases concentrated in a few countries . . . . . . . . . . . . . . . . . . . . . . 7 4 National governance system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5 Net change in HIPC indicator tracking scores, 2001­4 . . . . . . . . . . . . . . . 13 6 Measuring statistical capacity in IBRD, IDA, and IDA-Africa, 1999­2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7 Governance turnarounds: three trajectories . . . . . . . . . . . . . . . . . . . . . . . . 16 1.1 Progress toward the Poverty MDG Target, 1990­2002, and a forecast for 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.2 Evolution of investment climate indicators in Europe and Central Asia, 2002 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 1.3 Doing Business reform intensity in 2004 by region . . . . . . . . . . . . . . . . . . 33 1.4 The informal sector and the ease of doing business in 2004 . . . . . . . . . . . . 34 1.5 Progress in household access to infrastructure, 1995­2004 . . . . . . . . . . . . 35 1.6 Access to water, by water source . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 1.7 Primary deficit and public infrastructure investment, Latin America, 1980­2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1.8 Access to various forms of sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.1 Development assistance for education and health . . . . . . . . . . . . . . . . . . . 55 2.2 Developing-country spending on education and health. . . . . . . . . . . . . . . . 57 2.3 Share of total government spending for education and health, by region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 vii C O N T E N T S 2.4 Education unit costs in best-performing developing countries, 1999­2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 2.5 Share of bilateral education ODA commitments reported as at least half technical assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 2.6 ODA disbursements for education and health . . . . . . . . . . . . . . . . . . . . . . 62 2.7 Annual reductions in child mortality (number of child deaths per 1,000 live births) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 2.8 Delivery of immunizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 2.9 Share of 15­19-year-olds who have completed primary school. . . . . . . . . . 70 3.1 DAC members' net ODA, 1990­2005, and prospects for 2006 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 3.2 ODA increases concentrated in a few countries . . . . . . . . . . . . . . . . . . . . . 76 3.3 Acceleration in ODA needed to meet commitments . . . . . . . . . . . . . . . . . . 77 3.4 Indicators of progress: gaps between baselines (preliminary) and targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.5 Satisfaction improving with donor practices, 2003­5. . . . . . . . . . . . . . . . . 82 3.6 Strengthening trend in donors' poverty and policy focus . . . . . . . . . . . . . . 83 3.7 Lower debt service, higher poverty-reducing expenditures, 1999­2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 3.8 Impact of MDRI on debt ratios in HIPC . . . . . . . . . . . . . . . . . . . . . . . . . . 90 3.9 High-income countries' OTRI, overall and toward low-income countries, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 A3.1 OECD restrictiveness remains high for low-income countries, 2005. . . . . 100 A3.2 Changes in OECD OTRI between 2002 and 2005: as tariffs fall, non-tariff policies become more important. . . . . . . . . . . . . . . . . . . . . . . . 100 4.1 Gross disbursements by MDBs, 1999­2005 . . . . . . . . . . . . . . . . . . . . . . . 102 4.2 Trends in IDA investment and development policy lending, 1998­2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 4.3 Policy and poverty selectivity in 2003 and 2004. . . . . . . . . . . . . . . . . . . . 105 4.4 Evaluation and the results chain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 II.1 Governance and growth, 1982­2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 5.1 National governance systems: actors and accountabilities . . . . . . . . . . . . 125 5.3 Corruption in specific sectors in Europe and Central Asia, 2002­5 . . . . . 134 5.2 Administrative corruption in Europe and Central Asia. . . . . . . . . . . . . . . 134 6.1 Public financial management: a performance monitoring framework . . . . 140 6.2 Low-income aid recipient countries with CPIA 13 (quality of budgetary and financial management) scores, 2004 . . . . . . . . . . . . . . . . . 142 6.3 Cambodia: A platform approach to budget management reforms . . . . . . 147 6.4 Low-income aid recipient countries with CPIA 15 (quality of public administration) scores, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 6.5 Perceptions of service delivery performance in nine Bangalore agencies, 1994­2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 viii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C O N T E N T S 6.6 A constellation of checks and balances institutions. . . . . . . . . . . . . . . . . . 159 6.7 The virtuous circle of transparency: from disclosure to responsiveness. . . 160 6.8 Measuring country statistical capacity: IBRD, IDA, and IDA-Africa, 1999­2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 6.9 Governance turnarounds: three trajectories . . . . . . . . . . . . . . . . . . . . . . . 170 Tables 1.1 Per capita GDP growth in low- and middle-income countries (by region) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.2 Macroeconomic indicators for low- and middle-income countries (by region) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.3 Quality of macroeconomic policies in low-income countries, 2005 Share of countries falling into each category. . . . . . . . . . . . . . . . . . . . . . . . 25 1.4 Global economic environment and developing countries . . . . . . . . . . . . . . 27 1.5 Percentage of households with access to basic infrastructure services, quintile comparison (2000­4, latest observations available). . . . . . . . . . . . 37 1.6 Percentage of households with access to basic infrastructure services, urban-rural comparison (2000­4, latest observations available). . . . . . . . . 37 2.1 Sharp increases in child survival for some countries . . . . . . . . . . . . . . . . . . 51 2.2 Skilled attendants at delivery, by region, 1990 to 2003 . . . . . . . . . . . . . . . 52 3.1 Composition of net ODA: less reliance by donors on special-purpose grants in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3.2 Country-level progress on selected harmonization and alignment actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.3 Key features of the MDRI by institution. . . . . . . . . . . . . . . . . . . . . . . . . . . 88 3.4 Indicative donor commitments to IDA and AfDF over the next decade (Baseline: constant regular donor contributions in real terms--US$ billions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 3.5 Developing-country OTRI by geographic region and changes, 2002­5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 A3.1 New regional and multilateral trade agreements, 2004­5. . . . . . . . . . . . . 100 A4.1 COMPAS master matrix of categories and indicators. . . . . . . . . . . . . . . . 119 5.1 Nodes of transparency in national governance systems . . . . . . . . . . . . . . 126 5.2 2004 country scores for the CPIA public institutions cluster . . . . . . . . . . 130 5.3 Intermediate outcomes--corruption versus policy . . . . . . . . . . . . . . . . . . 135 5.4 Governance monitoring indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 6.1 Quality of budget management systems in 25 heavily indebted poor countries, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 6.2 Participation in the PRS, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 6.3 KK voice and accountability 2004, 66 low-income countries . . . . . . . . . . 164 6.4 Global Integrity Index--transparency and civic participation (by group) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 ix C O N T E N T S 6.5 The quality of some attributes of the justice system in 25 countries (by group) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 6.6 The quality of some direct oversight institutions in 25 countries (by group) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 6.7 State capacity and state accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 A7.1 Global checks and balances: international legal initiatives . . . . . . . . . . . . 189 A7.2 Global checks and balances: anticorruption treaties . . . . . . . . . . . . . . . . . 190 A7.3 Global checks and balances: international transparency initiatives. . . . . . 192 x G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 Foreword T his third annual Global Monitoring families struggle without access to clean water, Report (GMR) on progress toward or roads that would open access to schools, the Millennium Development Goals health care, and markets. In many cases, the (MDGs) comes with only 10 years remain- governance of countries does not inspire the ing to achieve them. It reports good and bad confidence of investors including, most impor- news. tantly, citizens of those same countries. Growth continues to be favorable and has This must change if we are to achieve the helped cut global poverty, in some cases dra- MDGs. The principle of mutual account- matically. Many countries have stayed the ability--of donors, the international finan- course with sound economic policies, which cial institutions, and recipient governments are delivering results, including some coun- for the quality of external support and for tries in Sub-Saharan Africa. The volume of improved performance--is central to accel- trade has grown worldwide, and private cap- erating performance. ital flows to developing countries continue to This GMR persuasively argues that gover- rise. Evidence is also emerging from some nance is one of the central challenges facing countries of rapid and tangible progress in developing countries and the global develop- improving primary education completion, ment community. Governance has gained raising immunization coverage, and lowering widespread currency, but its often vague def- child mortality. inition has limited its utility as an organizing The bad news is that many countries are concept for development, which is what it off track to meet the human development needs to be. This report offers a framework MDGs. The gains, impressive on a global that defines the parameters of what gover- scale, are unevenly distributed. For every suc- nance is, and gives us tools--drawn from cess story of rapid growth and job creation in various indexes--to assess its quality, across emerging East and South Asian cities, there different countries, sectors, and actors. are disturbing examples of increased poverty The GMR recognizes that there is no sin- in much of Sub-Saharan Africa, and among gle, unique way to effectively improve gover- large groups of people in many other parts of nance to reduce poverty, and acknowledges the world. In too many countries, infrastruc- that each country's path must be of its own ture is crumbling. Urgently needed investment choosing. But national customs cannot be a to modernize water, sanitation, and trans- smokescreen to defend practices that rob the portation facilities has proven unavailable, and poor of better opportunities, and undermine G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 xi F O R E W O R D a society's chance to develop. With this in To enhance aid effectiveness, aid transfers mind, the GMR provides a governance need to be more predictable, less fragmented, framework for monitoring and draws lessons more closely aligned with needs, and tar- from diverse international experience. It pre- geted to where the aid can be productively sents performance benchmarks on, among used. This includes better targeting to coun- others, sound financial management, public tries that are tackling the MDGs, and bring- procurement, settlement of legal disputes, ing greater flexibility to aid, so that it can and openness and transparency so as to cover recurrent costs, such as teachers' or ensure governments' accountability to tax- health workers' salaries, as well as gover- payers and citizens and to check corruption. nance reforms to improve service delivery. The GMR's framework for governance is The promise of increased aid will be realized the first step in establishing a more compre- only if it is used with sufficient rigor and hensive system for monitoring governance. imagination to deliver improved results. More investment is needed in actionable indi- The GMR reports progress in shifting the cators that can help to track progress, gener- emphasis of international financial institu- ate greater accountability, and build demand tions, including the World Bank and the for good governance. They can also help International Monetary Fund, toward results underpin long-term dialogue between coun- management--managing for outcomes rather tries and development partners, which should than managing inputs to the production develop realistic goals and sequencing of gov- process. But more work must be done by all ernance reforms. development partners to establish a longer- As developing countries tackle the chal- term vision, deliver more resources, and lenge of governance, the GMR also reminds increase support for capacity strengthening in us that the rich countries must meet their developing countries. With a decade left to commitments on aid, debt relief, and trade. achieve the MDGs, there is no time to lose. Paul Wolfowitz Rodrigo de Rato President Managing Director World Bank International Monetary Fund xii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 Acknowledgments T his report has been prepared jointly by nificant contributions to the overall report the staff of the World Bank and the through research and coordination.The core International Monetary Fund. In team from the International Monetary Fund preparing the report, staff collaborated was led by Andy Berg and included Anton closely with partner institutions--the Organ- Op de Beke (chapter 7), Peter Fallon, and isation for Economic Co-operation and its Carlos Leite. Development Assistance Committee, the Many others have made valuable contri- United Nations, the African Development butions, including the following from the Bank, Asian Development Bank, European World Bank: Olusoji O. Adeyi, Jim Bank for Reconstruction and Development, Anderson, Amie E. Batson, Gilles Bauche, and the Inter-American Development Bank. Robert Beschel, Amar Bhattacharya, The cooperation and support of staff of these Christina Biebesheimer, Rene Bonnel, Eduard institutions are gratefully acknowledged. R. Bos, Jeanine Braithwaite, Logan Brenzel, Mark Sundberg was the lead author and Cecilia Briceño-Garmendia, Lorelei Buntua, manager of the report. The work was carried Andrew Burns, Flavia Bustreo, William out under the general guidance of François Butterfield, Sarah Cliffe, Rui Coutinho, Bourguignon, Senior Vice-President, and the Stefano Curto, Angelique dePlaa, Adrian Di overall supervision of Alan Gelb, Director, Giovanni, Simeon Djankeov, Bill Dorotinsky, World Bank. The thematic work on gover- Rob Chase, Shaohua Chen, Graham Eele, nance was led by Brian Levy, with supervision Safinaz El Hag El Tahir Ahmed, Janet from Sanjay Pradhan, Sector Director, World Entwhistle, Christine Fallert Kessides, Bank. Paul Gertler provided supervisory sup- Shahrokh Fardoust, Lucia Fort, Luc-Charles port on the human development chapter. The Gacougnolle, Alison Gillies, Jonathan core team from the World Bank included Goldberg, Bee Ean Gooi, Engilbert Halsey Rogers (chapter 1), Barbara Bruns Gudmundsson, Poonam Gupta, Christopher (chapter 2), Punam Chuhan (chapter 3), Ariel Hall, Mary Hallward-Driemeier, Jonathan D. Fiszbein (chapter 4), and Brian Levy (chapters Halpern, Kirk Hamilton, Santiago Herrera, 5 and 6). The Bank core team also included Bernard Hoekman, Tim Irwin, Christianna Manuel Félix, Brendan Fitzpatrick, Ceren Johnnides, Melissa Johns, Erica Jorgensen, Özer, and Sachin Shahria, who provided sig- Ellis Juan, Dani Kaufmann, Phil Keefer, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 xiii A C K N O W L E D G M E N T S Barbry Keller, Steve Knack, Michael Koch, Boubacar Traore (African Development Peter Kolsky, Sahr Kpundeh, Aart Kraay, Bank); Ernesto Castagnino, Marco Ferroni, Jeffrey D. Lewis, Soe Lin, Saida Mamedova, and Max Puglar-Vidal (Inter-American Julio Mariscal-Pelaez, Susan McAdams, Rick Development Bank); Sam Fankhauser (Euro- Messick, Célestin Monga, Julia Nelson, pean Bank for Reconstruction and Develop- Alessandro Nicita, Christine Zhen-Wei ment); and Brian Hammond (OECD-DAC). Qiang, Shilpa Phadke, Sonia Plaza, Gauresh Guidance received from the Executive Shailesh Rajadhyaksha, Anand Rajaram, Directors of the World Bank and the Interna- Martin Ravallion, Francesca Recanatini, tional Monetary Fund during discussions of Randi Ryterman, Gary Reid, Prem Sangraula, the draft report is gratefully acknowledged. Shunalini Sarkar, Miriam Schneidman, Susan The report has also benefited from many use- Sebastián, Meera Shekhar, Rick Stapenhurst, ful comments and suggestions received from Susan Stout, Mikael Sundberg, Emi Suzuki, the World Bank and International Monetary Joel Turkewitz, Caroline Van Den Berg, Fund management and staff in the course of Dominique van der Mensbrugghe, Sona the preparation and review of the report. Varma, Luisa Sigrid Vivo Guzman, Kavita The World Bank's Office of the Publisher Watsa, Jerome Wolgin, and Roula Yazigi. managed the editorial services, design, pro- Contributors from the International Mon- duction, and printing of the book--in partic- etary Fund included Emmanuel Hife, George ular, Aziz Gökdemir, Susan Graham, Nancy Mubanga Kabwe, Jennifer Lester, Taryn Lammers, Stephen McGroarty, Brenda Mejia, Rounds Parry, Eric Robert, Deborah Siegel, Randi Park, Santiago Pombo-Bejarano, and Tanya Smith, Janet Stotsky, Harry Trines, and Stuart Tucker, along with Jacquie Ciardi of Delia Velculescu. Grammarians, Kirsten Dennison and associ- Contributors from other institutions ates at Precision Graphics, Melissa Edeburn, included Christopher Maccormac and and Chris Lester of Rock Creek Creative pro- Manju Senapaty (Asian Development Bank); vided excellent help with publishing this book Ferdinand Bakoup, Douglas Barnett, and on a very tight schedule. xiv G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 Abbreviations and Acronyms AAA Analytical and Advisory Activities DIME Development Impact Evaluation ADB Asian Development Bank DRF Debt Reduction Facility AfDB African Development Bank EAC East African Community AfDF African Development Fund EAP East Asia and Pacific AMC advance market commitment EBRD European Bank for AML anti-money-laundering Reconstruction and Development APRM African Peer Review Mechanism ECA Europe and Central Asia AsDF Asian Development Fund EFA FTI Education for All Fast-Track BEEPS Business Environment and Initiative Enterprise Performance Surveys EFTA European Free Trade Association BIS Baseline Indicator Set EITI Extractive Industries CAE Country Assistance Evaluation Transparency Initiative CAFTA Central American Free Trade ESF Exogenous Shocks Facility Agreement EU European Union CAS country assistance strategy FATF Financial Action Task Force CDD community-driven development FDI foreign direct investment CDI Commitment to Development FMIS financial management Index information systems CFT Combating Financing of G-8 Group of Eight Terrorism GAFTA Greater Arab Free Trade Area CG/RT consultative group and GAVI Global Alliance for Vaccines and roundtable Immunization COMPAS Common Performance GMR Global Monitoring Report Assessment System GNI gross national income CPIA Country Policy and Institutional GII Global Integrity Index Assessment GRECO Group of States Against CPRGS Comprehensive Poverty Corruption Reduction and Growth Strategy HIPC heavily indebted poor CS civil service country/countries CSO civil society organization IADB Inter-American Development CSR civil service reform Bank DAC Development Assistance IBRD International Bank for Committee (OECD) Reconstruction and Development DB Doing Business (surveys) ICS Investment Climate Surveys DFID U.K. Department for IDA International Development International Development Association G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 xv A B B R E V I A T I O N S A N D A C R O N Y M S IDA 14 14th replenishment of IDA OAS Organization of American States resources ODA official development assistance IEG Independent Evaluation Group OECD Organisation for Economic Co- IEO Independent Evaluation Office operation and Development IFC International Finance OED Operations Evaluation Corporation Department IFFIm International Finance Facility for OII Office of Institutional Integrity Immunization OTRI overall trade restrictiveness index IFI international financial institution OVE Office of Evaluation and IMF International Monetary Fund Oversight ISR Implementation Status and PBA performance-based allocation Results PEFA Public Expenditure and Financial ITN insecticide-treated bed net Accountability ITU International PFM public financial management Telecommunications Union PRGF Poverty Reduction and Growth JMP WHO/UNICEF Joint Monitoring Facility Programme for Water Supply and PRS Poverty Reduction Strategy Sanitation PRSP Poverty Reduction Strategy Paper KDP Kecamatan Development Program PSI Policy Support Instrument KK Kaufmann-Kraay PWYP Publish What You Pay KKZ Kaufmann, Kraay, and Zoido- QAG Quality Assurance Group Lobaton ROSC Report on Observance of LAC Latin America and the Caribbean Standards and Codes LDC least developed country RTA regional trade agreement LIC low-income country SA South Asia MAPS Marrakech Action Plan for SDR special drawing right Statistics SPA Strategic Partnership with Africa MDB multilateral development bank SPSP small-scale private service MDG Millennium Development Goal provider MDRI Multilateral Debt Relief Initiative SSA Sub-Saharan Africa MENA Middle East and North Africa SWAP sectorwide program MfDR Managing for Development TC technical cooperation Results TFP total firm productivity MIC middle-income country TI Transparency International MKSS Movement for the Rights of TPID IMF Trade Policy Information Peasants and Workers Database MTEF medium-term expenditure UNDP United Nations Development framework Programme NEPAD New Partnership for Africa's UNITA National Union for Total Development Independence of Angola NGO nongovernmental organization WDR World Development Report NPV net present value WHO World Health Organization NTM nontariff measure WP-EFF Working Party on Aid NURC National Unity and Effectiveness Reconciliation Commission WTO World Trade Organization xvi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 Executive Summary O ne decade remains to meet the Mil- accountability for results that was forged at lennium Development Goals (MDGs) the Monterrey Summit in 2002. that the international community set This Global Monitoring Report (GMR) out in 2000. In 2005 the international commu- reviews the efforts under way to strengthen nity reaffirmed its commitment to mutual mutual accountability. Greater resource flows accountability for achieving results and focused to developing countries must go hand in hand on scaling up resources. In the Paris Declara- with measures to make aid work more effec- tion, donors furthered commitments to raising tively. One key element is improving gover- aid effectiveness through better harmonization nance, both in developing countries and and alignment, and the G-8 Gleneagles Summit globally, to strengthen accountability for brought new aid and debt relief commitments. resource use and for development outcomes. Developing countries, in turn, reaffirmed their Measuring and monitoring governance, in commitment to strengthening governance and support of greater accountability and better pursuing strong development strategies. MDG outcomes, is the primary focus of this Yet the world is still far from achieving report. Monitoring governance can help to the MDGs. Many countries--particularly in clarify options for scaling up assistance and Africa and South Asia--are off track. can support broader efforts to strengthen Examples abound of slow or failing efforts: transparency and accountability, both nation- inadequate resources and weak governance ally and globally. contribute to over 10 million children dying annually of readily preventable diseases; Key Actions to Strengthen only three-fifths of urban and one-quarter Mutual Accountability of rural low-income households in low- income countries have access to improved The report highlights six key actions to sanitation facilities; aid is too often poorly accelerate progress toward the MDGs and directed; and international financial institu- strengthen mutual accountability. tions still emphasize loans and reports Favorable growth has helped reduce rather than development outcomes. In sum, poverty, but more even and accelerated much greater effort is needed to implement progress requires strengthening of infrastruc- the vision of global action and mutual ture and national investment climates. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 xvii E X E C U T I V E S U M M A R Y Growth of both middle- and lower-income need to be better understood, but evidence developing countries has accelerated since points to improving policies and to the impor- 2000, helping to secure further progress in tance of higher quality, more predictable, and reducing poverty. Aggregate income growth better coordinated aid to help finance teacher between 2000 and 2005 suggests a significant and health care worker salaries and other drop in poverty, by perhaps as much as 10 recurrent costs. Sustaining these trends will percent. But progress has been uneven, most require continued support for the aid harmo- of it taking place in East and South Asia. A nization and alignment agenda embodied in few countries in Africa have had some success the Paris Declaration of 2005, and governance in poverty reduction, but most countries in reforms to strengthen the quality of services that continent, and some in Latin America, and accountability of service providers. have seen poverty stagnate or worsen. Major aid and debt relief commitments Accelerating poverty reduction will require were made in 2005, but better aid and vigi- greater emphasis on improving the domestic lant monitoring are needed to guard against growth environment. Aid-recipient countries, risks to their effective implementation. Trade with the help of development partners, need to reform needs new life. improve the investment climate and channel The year 2005 has been a watershed for more resources to increasing household and scaling up aid commitments and deepening business access to basic infrastructure. These debt relief to low-income countries. Over are closely related, since access to infrastructure US$50 billion was pledged in new commit- is a critical element of the investment climate, ments by 2010, including a doubling of aid and both contribute to growth, employment, to Africa. The new multilateral debt relief and productivity. Investment climate surveys initiative will eliminate about $50 billion of show that poor countries place the greatest debt, reducing debt service by around $1 bil- burden on entrepreneurs and have reformed lion annually. business regulations the least--Africa had the But these commitments risk remaining lowest reform intensity in 2004. Moreover, for unfulfilled. Aid commitments may fall victim both the rural and urban poor in many low- to donor-country efforts to cut deficits. Debt income countries, the gap in access to basic relief is intended to be additional but may be infrastructure is widening. counted toward fulfilling aid targets. More- Recent progress in human development out- over, even if aid commitments are met, comes points to the need for more flexible aid, donors may not fulfill pledges to lift the qual- better coordination, and improved governance. ity of aid. Recent history suggests this will be Many countries, particularly in Africa and an uphill struggle--aid remains poorly coor- South Asia, are off track to reach the human dinated, unpredictable, largely locked into development MDGs. Over 10 million chil- "special purpose grants," and often targeted dren under the age of five die each year from to countries and purposes that are not prior- treatable causes. Most of these deaths could ities for the MDGs. Finally, debt relief raises be prevented by simple, known, and low-cost the risk of future unsustainable borrowing treatments. Only 34 of 143 developing coun- from commercial banks. Donors, the World tries are believed to be on track toward halv- Bank and the International Monetary Fund, ing the number of underweight children. and most important, recipient countries need Yet tangible evidence is emerging in some to monitor carefully aid flows and applica- countries of significant progress in human tion of the enhanced debt sustainability development outcomes since the late 1990s. framework to reduce these risks. Surveys reveal that in many countries the poor Following the modest progress with multi- are more than proportionately sharing in this lateral trade liberalization at the sixth minis- progress. The factors behind these successes terial meeting in Hong Kong (China), all xviii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 E X E C U T I V E S U M M A R Y countries must provide new impetus to rescue progress toward the MDGs. Corruption is a the Doha "development round." Hope is symptom of governance systems failure. The pinned on new negotiating modalities for multidimensionality of governance makes agriculture and industrial products, and com- precise monitoring difficult. The GMR lays prehensive draft schedules for liberalization out a framework that identifies governance to be negotiated by end-July 2006. Develop- indicators for tracking progress, improving ing countries' own liberalization also matters, transparency and accountability, and gener- and could account for half their potential ating greater demand for good governance gains from trade reform. Many poor coun- outcomes. It proposes a core list of 14 moni- tries are unlikely to gain from liberalization toring indicators, including both broad mea- in the short run, particularly in Africa, and sures of governance, as well as more specific, new aid-for-trade pledges have been made to actionable indicators. While both have their assist those that will be hurt. While crucial, uses, the GMR argues for greater investment aid for trade should not be viewed as a sub- in specific, actionable indicators. These include stitute for trade liberalization. the PEFA (public expenditure and financial The focus of the international financial accountability) indicators used to track public institutions (IFIs) must shift from managing financial management, procurement indica- inputs to achieving real results on the ground, tors, and business climate indicators. but this poses major challenges to both the There is no unique path to good gover- IFIs and developing countries. nance. Some countries may be strong in one International financial institutions have, dimension (such as bureaucratic capability) in the past, largely focused on inputs and but weak in others (such as checks and bal- processes rather than on development out- ances). Engagement by the development com- comes. Moving to a results management munity should reinforce positive momentum agenda will require a shift in institutional where it exists, push systematically for practices--which has only just begun with improved transparency, and at the same time the new efforts to develop a common per- enter into dialogue on long-term support for formance measurement system (COMPAS) lagging areas. Monitoring can help to track and integrating Management for Develop- progress across different dimensions, as well ment Results into multilateral development as assess the long-term sustainability of gov- banks' practices. Moving the agenda forward ernance systems overall. Where governance is requires making a long-term management weaker, engagement is much more difficult commitment to shifting institutional culture, and incremental steps are appropriate, focus- deepening efforts to systematically and trans- ing initially on efforts to increase transparency parently monitor performance indicators and and to strengthen local service delivery. to define the set of instruments (rules, incen- The international community must sup- tives, practices) to link behavior to perfor- port efforts to strengthen governance systems mance outcomes. Developing countries need through ratification and support for global to build statistical capacity to measure per- checks and balances. formance and put in place the elements of Good governance is not just the responsi- results management systems; IFIs and donors bility of developing countries. All countries must scale up their support for these efforts. must take responsibility for strengthening Governance should be regularly moni- global checks and balances and implementing tored to help track progress, generate greater strong anticorruption standards. Since the accountability, and build demand for further early 1990s, a framework of global checks and progress. balances has emerged, centered around pro- Governance is an important factor under- grams for international law enforcement (anti- pinning development effectiveness and money laundering, antibribery conventions), G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 xix E X E C U T I V E S U M M A R Y anticorruption treaties (for example, the income countries, which loom ever larger in United Nations Convention Against Cor- commercial dealings with poor countries. ruption), and international transparency ini- More generally, donors need to strengthen tiatives (such as the Extractive Industries their own anticorruption controls (including Transparency Initiative). These systems are through the debarment and cross-debarment still nascent but have made a promising start. of suppliers engaging in bribery and corrup- Donors and the IFIs should assist by pro- tion), increase transparency, and provide aid viding technical assistance and funding to in ways that encourage good governance support countries' participation. They can rather than fragmenting and depleting also encourage the participation of middle- already weak country systems. xx G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 Millennium Development Goals (MDGs) Goals and Targets from the Millennium Declaration GOAL 1 ERADICATE EXTREME POVERTY AND HUNGER TARGET 1 Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day TARGET 2 Halve, between 1990 and 2015, the proportion of people who suffer from hunger GOAL 2 ACHIEVE UNIVERSAL PRIMARY EDUCATION TARGET 3 Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling GOAL 3 PROMOTE GENDER EQUALITY AND EMPOWER WOMEN TARGET 4 Eliminate gender disparity in primary and secondary education, preferably by 2005, and at all levels of education no later than 2015 GOAL 4 REDUCE CHILD MORTALITY TARGET 5 Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate GOAL 5 IMPROVE MATERNAL HEALTH TARGET 6 Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio GOAL 6 COMBAT HIV/AIDS, MALARIA, AND OTHER DISEASES TARGET 7 Have halted by 2015 and begun to reverse the spread of HIV/AIDS TARGET 8 Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases GOAL 7 ENSURE ENVIRONMENTAL SUSTAINABILITY TARGET 9 Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources TARGET 10 Halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation TARGET 11 Have achieved a significant improvement by 2020 in the lives of at least 100 million slum dwellers GOAL 8 DEVELOP A GLOBAL PARTNERSHIP FOR DEVELOPMENT TARGET 12 Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system (including a commitment to good governance, development, and poverty reduction, nationally and internationally) TARGET 13 Address the special needs of the least developed countries (including tariff- and quota-free access for exports of the least developed countries; enhanced debt relief for heavily indebted poor countries and cancellation of official bilateral debt; and more generous official development assistance for countries committed to reducing poverty) TARGET 14 Address the special needs of landlocked countries and small island developing states (through the Programme of Action for the Sustainable Development of Small Island Developing States and the outcome of the 22nd special session of the General Assembly) TARGET 15 Deal comprehensively with the debt problems of developing countries through national and international measures to make debt sustainable in the long term TARGET 16 In cooperation with developing countries, develop and implement strategies for decent and productive work for youth TARGET 17 In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries TARGET 18 In cooperation with the private sector, make available the benefits of new technologies, especially information and communication Note: The Millennium Development Goals and targets come from the Millennium Declaration signed by 189 countries, including 147 heads of state, in September 2000. The goals and targets are related and should be seen as a whole. They represent a partnership of countries determined, as the Declaration states, "to create an environment--at the national and global levels alike--which is conducive to development and the elimination of poverty." Source: United Nations. 2000 (September 18). Millennium Declaration. A/RES/55/2. New York. United Nations. 2001 (September 6). Road Map towards the Implementation of the United Nations Millennium Declaration. Report of the Secretary General. New York. xxii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 Overview: Strengthening Mutual Accountability--Aid, Trade, and Governance I t has been five years since the Millennium the main MDG targets. As with past Global Declaration was signed by 189 countries, Monitoring Reports (GMRs), it reviews inter- and one decade remains to achieve the national efforts to support the Millennium Millennium Development Goals (MDGs). Declaration, including new commitments by Several events and publications in 2005 donor governments to augment aid flows and marked this milestone: the Paris High Level commitments by the international financial Forum in March, the UN World Summit in institutions (IFIs) to improve their effectiveness. September, the World Trade Organization One element widely recognized as essential meetings in December, and several major to the success of the mutual accountability reports on how to advance the MDG agenda. framework is governance. Measuring and mon- The year brought forth new commitments itoring governance pose major challenges, yet, of resources and actions, and a reaffirmation with interpretive caution, they are feasible. Part of the principle of mutual accountability. II of the report provides a platform for includ- World attention is focused on how to scale up ing governance in the ongoing MDG monitor- resource flows to developing countries--and ing of mutual accountability. It shows how such how to make certain that aid is used effec- monitoring can track progress across both tively toward reaching the MDGs. These two broad and specific (actionable) indicators of issues cannot be separated. Scaling up is about governance. Monitoring can also help to clar- changing the way in which development busi- ify options for scaling-up assistance and can ness is done. Donors and the international support broader efforts to strengthen trans- financial institutions must increase aid flows, parency and accountability, both nationally improve aid quality, and better align their sup- and globally. port with country strategies and systems. Donors also need to open up their markets to the developing world. Developing countries, Part I: Monitoring Progress for their part, must commit to sound develop- Reducing Income Poverty ment strategies and stronger systems of gov- ernance to ensure that resources will be The favorable global growth environment that effectively used. These commitments are the has helped sustain poverty reduction in recent essence of mutual accountability. years continued in 2005. Growth per capita This report examines key developments in for both low- and middle-income countries 2005 and monitors progress toward meeting averaged just under 5 percent in 2005, well G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 1 O V E R V I E W BOX 1 Global Monitoring Report 2006: six key messages Reducing poverty. Growth continues to be favorable, and progress with poverty reduction is accelerating globally. But progress is too slow in improving the business climate (including access to infrastructure) in many poor countries. Meeting human development goals. Many countries are off track to meet the human develop- ment MDGs. But tangible evidence is emerging that there has been significant progress in some countries. Critical to expanding this progress is increasing the ability of aid to cover recurrent costs (such as the salaries of teachers or health service providers) and governance reforms to improve ser- vice delivery. Meeting commitments on aid, debt relief, and trade. In 2005 there were major new commitments for increased aid and debt relief to low-income countries. The risk is that they may not materialize, or that debt relief may simply substitute for aid. Aid transfers need greater predictability, less frag- mentation, better alignment with needs, and targeting to where aid can be productively used. Mul- tilateral trade negotiations need to be accelerated. Strengthening results management. There is progress in shifting the emphasis of IFIs and coun- try programs toward results management--managing for outcomes rather than managing inputs to the production process. However, this shift requires a long-term vision, more resources, and sup- port for capacity strengthening in partner countries. Monitoring governance. Governance should be monitored regularly. To complement existing aggregate indicators, additional effort is needed to monitor specific, actionable indicators, such as quality of public financial management, procurement practices, and checks and balances. This mon- itoring can help to track progress, generate greater accountability, and build demand for good gov- ernance. It can also help underpin long-term dialog between countries and development partners to develop realistic goals and sequencing of governance reforms. Good governance is everyone's responsibility. IFIs and donors should support the emerging global framework for good governance, encourage country participation, strengthen their own anticor- ruption controls, and provide assistance in ways that strengthen transparency and country systems. above historic rates, as buoyant trade, low and financial sectors are sounder. But room interest rates, and strong growth in Organisa- for improvement remains. tion for Economic Co-operation and Devel- The strong expansion in trade volumes opment (OECD) countries helped sustain and higher commodity prices provide addi- performance. More rapid growth is likely to tional evidence of the favorable growth envi- have reduced poverty between 2000 and 2005 ronment. World exports grew by 14 percent significantly--simple projections based on in 2005. Oil exporters reported the fastest aggregate income growth suggest by as much growth, buoyed by the surge in energy prices. as 10 percent, or over 100 million people. Both China and countries in Sub-Saharan Contributing to this growth is the improve- Africa enjoyed a healthy 25 percent increase. ment in macroeconomic policy management. However, while strong overall growth has For low-income countries, macroeconomic helped reduce poverty, the gains remain indicators are now significantly better than in uneven. All regions have, to varying degrees, the 1990s. Middle-income countries, with shared in the recent favorable growth, but higher (and less volatile) growth than low- there are major differences in regional per- income countries, have become more resilient formance in reducing poverty (figure 1), and to economic shocks. Deficits have fallen, more in individual country performance. Much of flexible exchange rate regimes are in place, the improvement occurred in East and South 2 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E FIGURE 1 Poverty headcount by region, 1990­2002, and forecasts to 2015 East Asia & Pacific (EAP) Europe & Central Asia (ECA) Latin America & the Caribbean (LAC) Percent of population living on less than $1 a day 50 50 50 40 40 40 29.6 30 30 30 20 14.8 20 20 11.3 8.9 10 10 10 11.6 6.2 2.1 0.7 0.5 0.9 5.7 0 0 0.3 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Middle East & North Africa (MENA) South Asia (SA) Sub-Saharan Africa (SSA) Percent of population living on less than $1 a day 50 50 50 44.6 44.0 41.3 38.1 40 40 40 31.2 30 30 30 20.7 22.3 20 20 20 10 10 13.8 10 2.3 1.6 1.2 0 0.7 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 2002 2015 Goal Actual Projected Path to goal Source: World Bank staff estimates. Asia, and in Eastern Europe and Central Asia, Near-term prospects for growth and as stronger growth resumed after the Asian income-poverty reduction appear fairly good-- financial crisis, and the transition economies low-income countries are projected to continue adjusted to market systems. In Latin America, to rebound from their contraction of the early growth is up over the past two years, but it is 1990s (growing by nearly 4.5 percent per still too low to make strong inroads into capita in 2005), and middle- income countries poverty reduction. African growth has also are projected to grow by 4.6 percent per capita. improved, outpacing its historical average, by But the global environment also poses risks. accelerating to more than 2 percent per capita High oil prices threaten to slow growth in low- in 2005--but on current trends, few African income, oil-importing countries, particularly if countries will reach the MDG income- non-oil commodity prices weaken; stronger poverty target. However, several countries terms of trade helped offset oil import costs in within Africa have performed well over the 2005. Other continuing risks include abrupt last decade, due to a combination of better adjustment in global current account imbal- policies, enhanced trade performance, and ances, further increases in global interest rates, foreign aid. This demonstrates the potential and the failure of the Doha Round trade talks. for more rapid progress. Of added concern is the potential impact of G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 3 O V E R V I E W avian influenza on global commerce. Singly or All regions are off track on at least some of the in combination, these factors could undermine goals, and the two regions lagging most seri- recent gains in poverty reduction. ously behind--South Asia and Sub-Saharan Strengthening poverty reduction will require Africa--are off track on all of the goals. Chil- greater emphasis on the domestic growth envi- dren's nutrition is worsening in many parts of ronment through improving the investment cli- Africa; a majority of countries are not making mate, strengthening access to infrastructure, sufficient progress to reduce child mortality and enhancing opportunities for the poor. The and maternal mortality; and HIV/AIDS con- quality of the investment climate contributes tinues to spread across the world. In many strongly to growth, employment, and produc- countries much more needs to be done to tivity, all of which are important for sustainable reach the poor. poverty reduction. Tools for monitoring the However, the latest data also provide some investment climate--Investment Climate Sur- encouraging signs of progress: veys and Doing Business Indicators--show that poor countries place the highest burdens on The number of countries that have entrepreneurs, and on reform business regula- achieved or are on track to achieving uni- tions the least. Africa had the lowest reform versal primary completion (MDG 2) has intensity in 2004, and Eastern Europe and Cen- increased significantly since 2000, and the tral Asia had the highest. pace of progress has also increased. Even Basic infrastructure services--transport, faster rates of progress are observed in electricity, water, sanitation, telephones--are countries that have joined the global Edu- key both to a strong investment climate and cation for All Fast Track Initiative (EFA to sustained progress in human development FTI). Gender disparities in primary and outcomes. Half a billion people gained access secondary education (MDG 3) are also to electricity between 1995 and 2004. Tele- narrowing, with girls' enrollment rates phone subscribers quintupled in the 1990s growing faster than boys' in all regions, and are believed to have tripled since. But although the target of achieving gender while East Asia and the Middle East have parity by 2005 was not met. shown marked improvement, other regions While only 20 percent of developing coun- are losing ground for most infrastructure ser- tries are on track to reducing child mortal- vices on a per capita basis. For the rural pop- ity (MDG 4), the most recent survey data ulation, and for the poor in both rural and suggest that rates of progress are acceler- urban areas, access gaps are large and rein- ating in some countries, and very signifi- force their vulnerability. More resources and cant progress is being made to reach the greater innovation in service delivery and poor with key interventions, such as child- easy-to-maintain technologies are needed. hood immunizations. Finally, increasing access and opportunities Access of women to trained birth atten- for poor and vulnerable groups is comple- dants, the best indicator of maternal mor- mentary with improving growth perfor- tality (MDG 5), shows strong improvement mance. Equality of opportunity is at the heart in East Asia, more modest in Latin America, of the MDG agenda, particularly access to but shows little gain in Sub-Saharan Africa. public services and opportunities for human The first signs of decline in HIV/AIDS development--the focus of World Develop- infection rates (MDG 6) are emerging in ment Report 2006. high-prevalence countries such as Haiti, Uganda, and Zimbabwe. Evidence is growing that prevention programs work Meeting the Human Development Goals when they are intensive and sustained. The Regional progress toward the human devel- number of AIDS patients under treatment opment MDGs remains a cause for concern. in the developing world has scaled up 4 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E rapidly, approaching 1 million in 2005, vey evidence on primary school completion from less than 100,000 in 2000. And new yields a similar conclusion. global efforts to combat malaria are Better policies in the social sectors explain improving treatment and rapidly spread- some of the progress. An increasing number ing the use of treated bednets. of countries in all regions are adopting reforms to make education and health sys- Figure 2 shows the annual reductions in tems more effective and responsive to the child mortality between survey years in all 10 people they serve: increasing community countries for which the Demographic and voice in the management of frontline schools Health Survey data are available since 2002. and health facilities; allocating funds more It shows that nine of the countries have made transparently; managing the recruitment and gains, over half at quite rapid rates, ranging deployment of providers more effectively; from Burkina Faso (3.6 percent per annum) to measuring and publicizing student learning Madagascar (5.6 percent per annum). More- outcomes and other key results; and condi- over, the gains are reaching the poor. In four tioning income transfers to families on their of the countries, child mortality fell fastest use of education and health facilities. among the poorest quintile households. This There has also been a substantial increase is helping to reduce, albeit gradually, the gap in external support. Official development in performance of poor households. The sur- assistance (ODA) for primary education FIGURE 2 Annual reductions in child mortality (number of child deaths per 1,000 live births) 5.6 Madagascar, 1997­2003/4 106 4.3 4.7 Indonesia, 1997­2002/3 53 5.5 4.5 Philippines, 1998­2003 42 3.3 4.1 Bolivia, 1998­2003 75 4.8 3.7 Bangladesh, 1999/00­2004 94 3.3 3.6 Burkina Faso, 1998/99­2003 190 3.3 3.4 Morocco, 1992­2003/4 51 2.6 2.6 Mozambique, 1997­2003 178 4.1 0.6 Cameroon, 1998­2004 141 0.9 ­0.8 Kenya, 1998­2003 ­1.9 109 ­2 ­1 0 1 2 3 4 5 6 Percent annual change Poorest quintile Population average Source: World Bank estimates from Demographic and Health Surveys. Note: The boxed numbers show the number of child deaths per 1,000 live births in the most recent survey. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 5 O V E R V I E W nearly tripled between 2000 and 2004. Aid is Meeting Donor Commitments of Aid, also better aligned with MDG priorities, and Debt Relief, and Trade in education, the EFA FTI is producing tangi- Meeting donor commitments is a central ble gains in donor harmonization at both the facet of the mutual accountability frame- country and global level. However, spending work. Major progress was made in this area on health and education in government bud- in 2005: the international community sharp- gets is tracked only by the World Bank and ened its focus on the Millennium Develop- the IMF, and there is a need to improve the ment Goals and reaffirmed commitments to consistency of the data. increase aid, advancing the agenda for donor harmonization and alignment, and to expand Extending and sustaining these gains will debt relief to the poorest countries. But con- require more flexible and predictable aid. cerns over delivery remain. The main financing need in health and edu- In 2005 there were major new commit- cation is recurrent expenditures, yet less than ments to expand aid flows and deepen debt one-third of bilateral aid to low-income relief to the poorest countries. The UN World countries is in non-special-purpose grants Summit in September helped maintain the that can more readily be used for both recur- focus on the MDGs. Along with the Commis- rent costs and investment. The volatility of sion for Africa Report, "Our Common Inter- aid disbursements is another serious con- est," and the Millennium Project Report, straint to expanding social services, which "Investing in Development," the UN report, depend on multi-year financing of recurrent "In Larger Freedom: Toward Development, costs. Finally, there is evidence that transac- Security, and Human Rights for All," helped tions costs in health are increasing, with the focus international attention on development. growth of "vertical" global health initiatives. Several initiatives were launched at the G-8 These are key issues for the development Summit (July 2005) in Gleneagles, including community to resolve in order to accelerate pledges to: MDG progress. Ultimately, however, the achievement of Increase aid to Africa by $25 billion a year the MDGs is in the hands of developing by 2010--more than doubling the current countries. Increased and more flexible aid is assistance to the region--and to all devel- unlikely to materialize unless countries oping countries by about $50 billion. reduce resource leakages and strengthen Extend and deepen debt relief to the poor- accountability of service providers to the est countries. The G-8 proposal, the Multi- public. Cross-country studies show that, on lateral Debt Relief Initiative (MDRI), aims average, one in three health care workers is to cancel the roughly $50 billion of debt missing during unannounced facility visits, owed by Heavily Indebted Poor Countries and one in six teachers is also absent. Funds (HIPC) to the African Development Fund may fail to reach their intended level in the (AfDF), International Development Asso- budget if they are diverted before reaching ciation (IDA), and the International Mon- local clinics and schools. Sound expenditure etary Fund (IMF). management systems are needed to address this issue and to meet the fiduciary concerns However, concerns arise over whether of donors and finance ministries. While these new commitments will be delivered, many developing countries are taking steps and if so, how effectively. Delivering on to generate greater accountability in social commitments will require spelling out the service delivery, in most places deeper and mechanisms for their implementation and broader reforms are still needed, as discussed monitoring their execution against well spec- in Part II of this report. ified benchmarks. It will also require greatly 6 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E improving aid quality, and delivering it where costs. Flexible aid (non-special purpose grants it can be effectively used. and multilateral ODA), which could be used to meet recurrent and capital costs for MDG- I N C R E A S I N G T H E V O L U M E A N D related expenditures, increased by only 8 per- Q U A L I T Y O F A I D cent, from $38 billion to $41 billion. Aid from the Development Assistance Com- mittee (DAC) countries of the OECD totaled Harmonization and alignment. Progress with $80 billion in 2004, and rose further in 2005 the agenda on harmonization and alignment, to an estimated $106 billion, averaging 0.33 as embodied in the "Paris Declaration" of the percent of GNI. Most of the large increase in High Level Forum in March 2005, is a prior- 2005 is due to debt relief to Iraq and Nigeria, ity. The 12 global targets for enhancing aid and total aid has yet to reach relative levels of effectiveness by partner countries, donor assistance in the early 1990s. There is a wide countries, and the multilateral development range in country contributions: five DAC banks are not just symbolic. Implemented, members provide over 0.7 percent of GNI in they will radically transform the way most aid aid, while the United States provided the low- is delivered. A preliminary baseline has been est share (0.17 percent of GNI in 2004). Non- developed, but the gap between the baseline DAC donors also increased their aid and the targets is wide. Donors and the IFIs contributions 9 percent in 2004, which brings face challenges in changing management prac- the total assistance to $3.7 billion, or 0.18 of tices and incentives. Regular monitoring and GNI (of which Arab countries contributed peer pressure, it is hoped, will advance this 0.85 percent of GNI in ODA). agenda. The aid commitments by DAC countries, however, add up to much more than $106 bil- Selectivity. Aid allocation will need to shift if lion. If all aid committed over the 2006­10 support for the MDGs is to be the objective. period were disbursed, it would lift DAC con- Evidence on aid allocation among countries tributions further by $24 billion--to about underscores that aid is often not channeled to $130 billion--in real 2004 dollars. More aid where the impact on the MDGs is likely to be will need to be in non-debt relief forms as greatest. While aid selectivity is increasingly large opportunities for debt relief are based on need (poverty level) and ability to exhausted. Monitoring real aid disburse- effectively use aid (quality of policies and gov- ments by DAC members is important for ernance), there is evidence that other factors holding donors accountable to their interna- still determine a large share of aid disburse- tional commitments. ments. For example, over 60 percent of the Of equal importance for enhancing the increase in ODA between 2001 and 2004 was contribution aid makes to the MDGs is the directed to three countries--Afghanistan, the quality and composition of ODA. Three key Democratic Republic of the Congo, and Iraq, elements warrant attention: aid flexibility, although these three countries collectively harmonization and alignment of support, and account for less than 3 percent of the poor country selectivity. people in developing countries (figure 3). Flexibility. Increasing the share of flexible aid, M A K I N G P R O G R E S S I N D E B T R E L I E F which can be targeted at meeting MDG needs, The Multilateral Debt Relief Initiative (MDRI) is a priority for scaling up. Over 70 percent of that emerged from the G-8 Summit in July bilateral aid from DAC countries between 2005, complements the existing efforts to 2001 and 2004 was in the form of special pur- reduce the debt burden facing HIPCs. The pose grants: debt relief, technical cooperation, existing HIPC initiative has delivered debt food aid, emergency aid, or administrative relief to 28 countries as of end-2005. Debt ser- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 7 O V E R V I E W FIGURE 3 ODA increases concentrated in a few countries M E E T I N G C O M M I T M E N T S T O L I B E R A L I Z E I N T E R N A T I O N A L T R A D E Top 10 recipients of the increase Advances in multilateral trade reform talks in in net ODA, 2001­4 2005 remained elusive. The roadmap that Iraq emerged from the Hong Kong, China talks Afghanistan still requires concurrence on the most divisive Congo, Dem. Rep. of issues--agriculture and industrial products. Angola This roadmap is scheduled to be agreed on by Madagascar Sudan April 2006, and finalized by October 2006. Zambia Other outcomes of the Hong Kong, China Ghana meetings were modest. Agricultural export Senegal subsidies are to be phased out by 2013, con- Ethiopia ditional on disciplining equivalent programs 0 1 2 3 4 5 such as food aid. Duty-free and quota-free 2004 US$ billions access to developed country markets for prod- ucts from the least-developed countries was Source: OECD DAC database. significantly weakened by the likely exemp- tion of 3 percent of tariff lines in key products. Some success was achieved in support for "aid-for-trade," in recognition that the poten- vice to fiscal-revenue ratios was halved, and tial gains from trade are not evenly distributed expenditures related to poverty reduction are and many countries, particularly in Sub- estimated to have increased from $6 billion to Saharan Africa, lack the requisite infra- nearly $11 billion. The new MDRI initiative structure and skills base to benefit from goes beyond this level to cancel all of the debt multilateral trade liberalization. The United claims of the African Development Fund States, the United Kingdom, Japan, and the (AfDF), IDA, and the IMF for countries that European Commission have all committed to have reached, or will eventually reach, their increasing resources for building trade capac- completion points under the HIPC initiative. ity in low-income countries. There is a criti- The IMF has already fully implemented the ini- cal need to ensure that aid for trade is tiative, while the AfDF and IDA are finalizing effective and is not a substitute for allowing arrangements. As a result, the estimated greater market access. annual debt service flows of these countries will fall by around $1 billion annually over the IFI Performance: Strengthening next decade, and by somewhat higher amounts Results Management after that. To lock in these gains (estimated at about A final key element of the mutual account- $1 billion annually for the first decade) care- ability framework rests with efforts by the ful benchmarking and monitoring are IFIs to support development outcomes. How- needed. With the MDRI a new benchmark in ever, assessing their contribution to actual aid is needed to ensure that there is no count- development outcomes is complex, because ing of debt relief against higher DAC country there are many other determinants and part- aid commitments to the IFIs. Accumulation ners, in particular, country governments. The of new, unsustainable debt is another risk fac- focus here is on evaluating the IFI progress ing MDRI recipients. The debt sustainability with the results orientation of their manage- framework is currently under review to ment practices, their contributions to devel- ensure that it helps guard against this risk and opment finance, the strengthened impact supports HIPC country efforts to improve evaluation, and aspects of institutional expenditure composition. integrity and transparency. 8 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E Implementing the results agenda. The 2004 orous evaluations are currently under way Marrakech Roundtable on Results called for through DIME, on education projects, condi- a monitoring system to assess the results ori- tional cash transfer programs, and slum- entation of the multilateral development upgrading initiatives. banks (MDBs); that system is COMPAS, the Common Performance Assessment System, Financing flows. In 2005 lending through the which draws on MDB frameworks and concessional and non-concessional windows of action plans to implement managing for the MDBs declined, although the dip in con- development results (MfDR). While it is still cessional lending was due, mainly, to con- too early for robust assessment, the initial straints on IDA-13 resources and to a spike in COMPAS efforts are promising: awareness of IDA disbursements the previous year. In general results is increasing, and frameworks, sys- there is an upward trend in MDB financing to tems, and procedures are being put in place in low-income countries, and the IDA-14 replen- all the institutions. ishment provides for this to continue through The degree and manner in which MDBs 2007. In contrast, disbursements to middle- are carrying out the results agenda varies. A income countries have steadily declined for key challenge will be to establish an institu- some years, and net lending has been negative. tional culture of using the information on Several factors shape the middle-income results to inform decision making. MDBs face country demand for funding: shifting demand trade-offs that complicate implementation. toward sovereign bond financing; prepayment There is tension between alignment with of older, higher-cost loans; greater financial country systems and fiduciary concerns. market access with improvements in credit- There are also significant gaps between insti- worthiness; and slow development on the part tutional harmonization policies and country of MDBs of new, innovative financing mecha- level practices, raising questions about align- nisms for the middle-income countries. Better ing staff incentives with the MfDR frame- alignment of MDB strategies with evolving work. Focusing the MDBs on outcomes, middle-income country needs is necessary. rather than on the more traditional input management, will require a sustained effort. Improving alignment, integrity, and trans- Implementation will require both a strength- parency. An outgrowth of the Paris Declara- ened MfDR capacity in partner country gov- tion is the commitment by donors and IFIs to ernments and long-term MDB commitment. support the development of national systems Impact evaluation is a key component of over parallel donor structures. MDBs are results management. Each IFI has an inde- adopting different approaches to this goal, pendent evaluation unit that conducts both including technical assistance to strengthen institution-wide assessments--for example in country systems and testing country systems support of health sector reforms, pension sys- in select countries. The IMF's experience with tems, or the quality of analytic work. The safeguard assessments of Central Banks pro- MDBs also assess specific country programs vides a positive example in this area. So far and projects. Additional efforts are under there has been limited progress in the use of way to help develop more robust, evidence- country systems, due, in part, to inherent based advice to partner countries that can risks and fiduciary concerns. help define the types of interventions they MDBs' concerns about corruption range should support. Two examples are the Devel- from preventing fraud and corruption in opment Impact Evaluation initiative (DIME) MDB-financed projects, to promoting good at the World Bank, and the program of governance in country programs, and to sup- impact evaluations launched in the Inter- porting international efforts to fight corrup- American Development Bank (IADB)'s Office tion. Efforts are under way to improve their of Evaluation and Oversight. Two dozen rig- ability to reduce corruption in the use of G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 9 O V E R V I E W their own funds, and to empower investiga- dialogue, and notes some indicators that tive departments. However, numerous chal- might be used in going forward, together with lenges remain: ad hoc reactions to instances some additional work to develop them. This of corruption remain the norm while system- framework identifies some patterns of gover- atic management of risks is still being devel- nance across countries and over time, and oped. Moreover, ring-fencing of projects highlights challenges for strengthening gover- cannot substitute for strengthening country nance. The complexity of governance and the systems, which is a much more challenging need to proceed with caution should be borne and lengthy task. in mind. Improving transparency is part of the Improving governance is not simply a mat- effort to strengthen IFI accountability. Evi- ter for aid recipients. The global milieu has dence shows that transparency is improving, powerful influences on governance systems in which makes it easier for country partners to developing countries. Global markets can be scrutinize policies that affect them and to par- a source of virulent, corrosive corruption or ticipate more in the development dialogue. a powerful disciplining device. Donors and Disclosure of country performance ratings by IFIs can impose practices and reporting the IADB, and those planned for 2006 by the requirements that fragment and overwhelm AfDF, Asian Development Fund (AsDF), and already fragile country systems, or they can IDA, are cases in point. The IMF's speedy provide support in ways that help strengthen publication of country reports is another. governance. Global mechanisms can help poor countries strengthen governance to meet Part II: Governance as Part the MDGs, including promoting standards of Global Monitoring and codes to provide sources of good practice for all countries. For this reason, the estab- Governance has emerged as an essential ele- lishment of global checks and balances is ment of the mutual accountability framework. another priority. The UN Millennium Project report cites "gov- ernance failures" as one of four obstacles to A Framework for Monitoring reaching the MDGs. The UK's Commission Country Governance for Africa report recommends improved gov- ernance, together with market opening, as Public sector governance can be defined as the keys for alleviating poverty. Governance is way the state acquires and exercises its also highlighted in new donor approaches, for authority to provide and manage public instance in the European Union's Cotonou goods and services, including regulatory ser- Agreement--effective in 2005, and the United vices. A governance system has both a supply States' Millennium Challenge Account. Devel- side (the capabilities and organizational oping countries, too, have noted the centrality arrangements embodied in its players) and a of governance; for example, in the New Part- demand side (the accountability arrange- nership for Africa's Development (NEPAD)'s ments that link the players to one another). Africa Peer Review Mechanism. Yet, while To monitor governance--and to improve it-- empirical research links governance-related a framework is needed to cut through the institutions and development, there is not yet complexity. The GMR lays out one possible a consensus as to how to approach gover- framework, which identifies the key actors in nance and its measurement. a national governance system and the key This GMR aims to provide a platform for accountability relationships among them (fig- the inclusion of governance as an ongoing ure 4). part of MDG monitoring. To do so, it pro- vides a governance monitoring framework Political leaders are the prime drivers, setting that can enable a more empirically grounded the objectives for the rest of the governance 10 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E FIGURE 4 National governance system Actors Political governance: citizens, leaders, and Accountability political parties Accountability = rules, Public administration Checks and balances information and and financial institutions transparency, management agencies enforcement mechanisms Service provision and regulatory organizations Citizens and firms Citizens and firms Outcomes: policies, services, and regulations Source: Authors. system. Often they work for the general inter- Citizens and firms are central to effective est; other times they cater to special interests accountability. Citizens select political lead- and core supporters. Sometimes these power- ers; as users of services, citizens and firms can ful interests may capture the state. Even a also hold providers accountable for the effi- democratic electoral process does not guar- ciency and effectiveness of service provision. antee that politicians will focus on the general Within such a system, effective accountabil- interest. ity requires clear rules and expectations, trans- parent information to monitor performance, Checks and balances institutions are impor- and incentives and enforcement mechanisms tant for the sustainability of effective gover- that reward success and address failure. Trans- nance. They include parliaments, independent parency is not sufficient, on its own, for good oversight agencies (audit institutions, ombuds- governance, but it is a powerful feature for men, and anticorruption commissions), the improvement, with broad applicability across judicial system, a free press, and accountable an array of public actions. local governments. Corruption is one outcome of a gover- The public bureaucracy is the implement- nance system. It can reflect the failure of any ing arm of government. It includes both cross- number of accountability relationships--for cutting public administration and financial instance, political failure leading to state cap- management control agencies (such as the ture, bureaucratic failure, or a failure of Ministry of Finance) and agencies that directly checks and balances. deliver social and regulatory services to citi- While it may be difficult to get more than zens and firms (for example, education or a subjective measure of political governance, licensing). the capability of the bureaucracy, the strength G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 11 O V E R V I E W of checks and balances, and some aspects of raising awareness, and they can also focus service delivery can be measured more objec- attention on broad areas in which individual tively. The framework thus points to three countries can strengthen their national sys- different ways in which governance can be tems. However, these broad indicators, as monitored, and for each, specific foci for with all governance indicators, are also sub- measurement are suggested: ject to quite wide measurement errors. Ranking countries on the basis of the KK A: Overall governance performance: corruption indicators, for example, only 87 (i) Summary measures of governance out of 203 can be confidently assigned to top, system quality; middle, and bottom thirds. The standard (ii) Control of corruption; measurement error in the CPIA is of a similar (iii) Quality of economic and sectoral relative magnitude. Assessments can there- policies. fore broadly distinguish high-, middle-, and B: Quality of bureaucracy: low-rated countries, but some are likely to be (i) Public financial management and misclassified when ratings are broken down procurement systems; on a much finer scale. Governance indicators (ii) Public administrative systems; also may not be able to pick up with preci- (iii) Front-line service provision and sion the modest, short-run changes in gover- regulatory agencies. nance, although they will do better at C: Performance of checks-and-balances signaling longer-run trends. In sum, broad institutions: governance indicators are useful but have (i) Constraints on the executive; limitations, including their margins of error; (ii) Justice and the rule of law; as a basis for cross-country comparison, they (iii) Transparency and voice. need to be applied with caution. A second approach is to use narrow mea- sures of the quality of specific governance The Challenge of Monitoring Governance subsystems. While these too can have non- Measuring governance is difficult. Formal trivial measurement error, the narrow focus systems can be categorized and rated--but of specific indicators makes them "action- the gap between formal arrangements and able" in the sense that they can help to iden- realities on the ground is often wide. Institu- tify governance weaknesses and to monitor tional processes are difficult to observe and improvements. Specific governance indicators measure systematically. Two complementary are being used in diverse ways: approaches respond to these measurement challenges. The Public Expenditure and Financial One approach is to use broad measures to Accountability (PEFA) program uses 28 monitor aggregate governance. The GMR indicators to track public financial man- highlights as useful several aggregate indica- agement. tors, including the so-called Kaufmann- The Doing Business and Investment Cli- Kraay (KK) indicators compiled by the mate Surveys are creating monitoring base- World Bank Institute on the basis of a large lines for regulatory performance, including number of (mostly external) assessments, a baseline for corruption. Transparency International (TI) indicators, The Center for Global Integrity has applied and the Country Policy and Institutional a detailed set of indicators on the quality of Assessments (CPIAs) compiled by the World checks and balances in 26 countries. Bank (the 2005 ratings are to be released for Detailed indicators have been developed IDA countries in 2006). for monitoring procurement, the quality of These broad governance indicators have statistical systems, and administrative many uses. They can be powerful forces for reform. 12 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E User scorecards and similar surveys pro- FIGURE 5 Net change in HIPC indicator tracking scores, 2001­4 vide an entry point into governance from the perspective of service delivery. Number of countries 8 So far, however, other than in the areas 7 7 related to private sector development and to 6 6 the public financial management for HIPC 6 countries, there has been no focus on refining 5 and applying such indicators systematically. Between them, the broad and narrow 4 approaches to governance monitoring yield 14 governance measures that are currently avail- 3 able, offer comprehensive country coverage, 2 2 and cover each of the diverse facets of national 1 governance systems. These measures can pro- 1 vide a useful baseline for ongoing governance 0 monitoring to move forward. The greatest Decline Decline No Improvement Improvement value-added for governance monitoring will in 3 in 1­2 change in 1­2 in 3 or more categories categories categories categories come from the improvement of specific indica- tors. More sustained use and investment in specific, actionable, governance indicators is a Source: IDA and IMF 2005, update on HIPC tracking. recommendation of this GMR. administration and procurement, where mon- Strengthening Bureaucratic itoring has been piloted in 10 countries. Capability, Checks and Balances, and Service Delivery Checks and balances: the role of trans- Bureaucratic capability. Strengthening public parency. While transparency is alone not suf- financial management (PFM) is an area of ficient for good governance, its role in great importance for scaling up aid, and it is national governance systems is pervasive-- also the area in which most progress has been from the political apex of the system, through made in developing and applying specific, the publication of judicial decisions, to a free actionable indicators. Assessments of the qual- press, and all the way to the service provision ity of budget and financial management sys- front line. Transparency has a supply side and tems conducted in both 2001 and 2004 for 22 a demand side. On the former, quality infor- HIPC countries showed that, while progress is mation built on a platform of robust statisti- uneven, countries that are determined to cal capacity is key, as is assuring that citizens improve their public financial management enjoy a right to information. Over 50 coun- systems can do so quite rapidly. Seven coun- tries had adopted the Freedom of Informa- tries, including Ghana, Mali, Senegal, and tion Laws by end-2004, with efforts under Tanzania, achieved substantial improvements way in an additional 30 countries. However, between 2001 and 2004 (figure 5). Especially assessments done for IDA-14 paint a worri- for countries that receive budget support, some picture of the statistical capacity in IDA improvement in PFM should be monitored. countries (figure 6). Many lack the capacity With political commitment and support, many to produce high quality information, which countries should be able to achieve reasonably leads to a vicious circle of low attention to strong PFM within a 5- to 10-year period. Sim- data and low demand for improvement; ilar approaches can be used to monitor and progress in this area is slow, especially in low- guide reforms in other areas, including public income Africa. Extended support for the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 13 O V E R V I E W FIGURE 6 Measuring statistical capacity in IBRD, IDA, and IDA-Africa, 1999­2005 Percent 100 90 80 70 60 50 40 30 20 10 0 IBRD IDA IDA-AFR IBRD IDA IDA-AFR IBRD IDA IDA-AFR Practice Collection Availability 1999 Change between 1999­2005 Source: Country Statistical Information Database (www.worldbank.org/data/countrydata/csid.html). Marrakesh Action Plan for Statistics, an options in weak governance settings. Some international response to the challenge of facets of the business environment, such as improving capacity to monitor the MDGs, is levels of unofficial payments for specific ser- an important component of efforts to vices, can be linked to governance and are strengthen transparency. increasingly being monitored through instru- On the demand side, an active civil society ments such as the Doing Business Indicators is key to translating transparent information and Investment Climate Surveys. Surveys for into action. Together with government agen- Europe and Central Asia, for example, found cies, a Philippine citizen monitoring program that corruption was most pervasive in licens- identified losses of more than $3 million that ing, tax administration, and obtaining gov- the Department of Education promised to ernment contracts. rectify. In Tanzania, the Rural Initiatives and In countries where formal "top-down" Relief Agency helped local communities accountability is weaker, sector-wide programs, track government program expenditures and decentralization, and community-based (CDD) ensure that funds were indeed delivered. approaches have become increasingly used to Both cases, with grants of under US$25,000, enhance service delivery. The World Bank alone help to underscore the notion that empower- channeled over US$10 billion directly to poor ment through information can be a low-cost/ communities between 1999 and 2005. All of high-return strategy for improving gover- these approaches have limitations. Donors fail nance. The donor and IFI community should to harmonize; for instance, in 2004 Tanzania design its operations and programs to sys- had 110 education projects on the books with tematically go beyond technocratic dialogue an estimated average size of under $1 million. with officials and actively foster trans- Donor financial projects often bypass line min- parency by bringing information on analysis istries and subnational governments. While a and performance into the public domain. 2005 review concluded that CDD projects Service delivery can be an entry point for have supported participation and helped to better governance, and may be one of the few get services to citizens cost-effectively in var- 14 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E ious administrative settings, the wider impact mix of governance strengths and weaknesses. on governance of such approaches is still Some countries have relatively capable pub- debated. In difficult governance settings, sec- lic bureaucracies, but weaker checks and bal- toral and bottom-up approaches may be the ances institutions; others have the reverse. most feasible entry points for governance Some with weak policies appear to be less reform, although their effects are slow, indi- corrupt; others, who are stronger on the pol- rect, and uncertain. These approaches need to icy front, seem to be less successful in con- be monitored for their impact on both the trolling corruption. Bangladesh is perhaps demand for, and supply of, good governance. the best known example of a country with relatively weak perceived control of corrup- tion but strong performance on policies and Approaching Country Diversity: on poverty reduction. Several other countries The Need for a Long-Term Perspective share this paradoxical pattern. These pat- Even taking margins of error into account, terns reflect many institutional and historical some judgment as to governance quality can factors. be made for about two-thirds of the 66 low- Figure 7 illustrates three possible trajec- income countries. At the upper end of the tories for governance turnarounds. In the spectrum, about one-third of countries gen- first trajectory (Indonesia in the 1970s and erally score well across all or most measures. Uganda in the 1980s are examples), a devel- At the lower end of the spectrum, another opmental political leader takes power and one-third generally are in the bottom two focuses on liberalizing the economy and quintiles on the outcome measures, and gen- strengthening the performance of the public erally do not score well on the measures of sector--with checks and balances a lower subsystem quality either. These latter coun- priority. Poverty reduction gains can be tries are basically stuck in clientelism, or state rapid in this scenario, but if country reform- failure. ers and development partners wait too long But many countries (including some in to put the challenge of strengthening checks these two groups) have a strikingly uneven and balances onto the agenda, the conse- FIGURE 7 Governance turnarounds: three trajectories Trajectory I Trajectory II Trajectory III Quality of bureaucracy high low low high low high low high Quality of checks and balances institutions Initial turnaround Desirable follow-through Source: Authors. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 15 O V E R V I E W quence (as in Indonesia during the latter address corruption, which complements Suharto years) can be rising corruption, regional anti-corruption treaties. It recog- financial crisis, a difficult process of political nizes the recovery of looted assets as a "fun- succession, and a reversal of earlier gains. damental principle." In the second trajectory, a country moves International transparency initiatives: rec- to political pluralism (for example, Albania in ognizing the special challenges posed by the early 1990s and Nigeria more recently). concentrated natural rents, the Extractive Only sometimes does this new political open- Industries Transparency Initiative for ness translate into stronger bureaucratic hydrocarbons and other minerals, and the capability. In the third trajectory, following Kimberley Process Certification Scheme state collapse, international intervention or for raw diamonds, build on broad interna- support helps to provide an umbrella of tional support for transparency. security under which both the bureaucracy and checks and balances institutions are re- The success of these international initia- established (Mozambique offers an example tives is not easy to monitor. Assessments sug- of a country that appears to have followed a gest that a promising start has been made, balanced trajectory). but there is a very long way to go before In the short term, none of these turn- global good governance becomes really effec- arounds is superior to any other, but eventu- tive, and this will require sustained support. ally improvements in governance need to The Kimberley process has been relatively evolve in a balanced way. Development part- successful. Almost all producer countries ners need to take the different governance tra- participate, as do all major rough-diamond jectories into account and to engage, on a importing countries. But recovering looted long-term basis, to strengthen lagging ele- assets is still difficult, with low rates of asset ments of the governance system. It took many recovery. Of the estimated $12 billion to $20 years for durable governance institutions to billion looted by Presidents Mobutu, Abacha, emerge in today's industrial countries. and Marcos, only some $1.5 billion has been recovered. Offenders frequently have to be charged with tax evasion rather than corrup- Strengthening Global Checks tion. Some programs still have noticeable and Balances loopholes, such as the exclusion of transac- Since the early 1990s, a framework of global tions related to the financing of political par- checks and balances has emerged, which is ties. Still, it is worthwhile recalling that only centered around three types of programs: a few years ago foreign bribes were consid- ered a legitimate business expense by many International law enforcement: OECD's OECD counties. anti-foreign bribery convention and the IFIs and donors can assist these checks anti-money laundering activities of the and balances processes by providing techni- Financial Action Task Force complement cal assistance and funding to support coun- each other; they help to tackle interna- tries' participation, and by encouraging the tional corruption and they enable OECD participation of middle-income countries, countries to share in the prosecutorial bur- which loom larger in commercial dealings den. This is valuable for poor countries, with poor countries. More generally, donors which often lack the capacity and reach to can strengthen their own anti-corruption pursue complex cases across international controls (including through the debarment borders. and cross-debarment of suppliers engaging Anti-corruption treaties: the UN Conven- in bribery and corruption), increase trans- tion Against Corruption (effective December parency, and provide aid in ways that 2005), provides a global legal framework to encourage good governance rather than 16 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 S T R E N G T H E N I N G M U T U A L A C C O U N T A B I L I T Y -- A I D , T R A D E , A N D G O V E R N A N C E fragment and deplete already weak country ODA to help meet the MDGs? For the one- systems. Implementation of the Paris Decla- third or so of IDA-recipient countries that ration is needed both to improve the quality score well on most governance measures, the of aid and to contribute to good global gov- task is easier. They have in place budget man- ernance. Developing countries have begun agement and administrative systems that are to implement mutual programs to support reasonably capable of targeting spending to good governance, in particular the NEPAD developmental priorities, and executing and African Peer Review Mechanism: donors monitoring expenditures. From a governance can also help to support such programs. perspective scaling-up can proceed with The stakes are high. While worldwide cor- fewer constraints. ruption is difficult to quantify, one estimate In the remaining countries, scaling up may puts the proceeds at $1 trillion annually. For require some alternative approaches. First, a single case, the Iraq Oil-For-Food Program, even where current systems fall short, aid the Volcker report documents kickbacks of might be scaled up based on a clearly improv- $1.5 billion by 2,235 suppliers. How this is ing trend in the quality of budget and admin- settled will provide a strong signal on the seri- istrative management systems. In such settings, ousness with which the OECD countries sup- aid can be seen as an investment in strength- port the fight against corruption. ening country systems. For countries deter- mined to improve their administrative budget systems, achieving a "good enough" standard Scaling Up: Moving the Agenda Forward within 5 to 10 years may be feasible. Scaling up is about much more than aid: it is, A further objective could be to focus on at heart, a question of making mutual account- reforms that foster transparency--in budget ability work. Donor governments, IFIs, and management and more broadly. Trans- partner governments must all work together to parency relies on public information as a reinforce their accountability to deliver on source of pressure for better public sector commitments for enhanced aid, to reform performance--in a less technocratic way than trade, to harmonize and align support with is implied by top-down reforms of bureau- strategies, and to implement sound national cratic capability. Even with continuing weak- development strategies. ness in administrative systems, a case could Governance is a critical part of this agenda. be made for scaling up aid to countries that Donors, IFIs, and developing countries are clearly commit themselves to facilitating broadly accountable for strengthening the transparency in how public resources--and checks and balances that are fundamental for state power more broadly--are used. development and its financing, through both The third approach is to target scaled-up global and national systems. For developing aid more directly toward poverty-reducing ser- countries, well functioning and transparent vices. In countries where bureaucratic capabil- budget, administrative, and procurement sys- ity may be on the upturn but is at an early stage tems; a political process responsive to the of improvement, sector-specific approaches country's citizenry; and strong checks and bal- that focus on improving governance and ser- ance systems are key to a well functioning vice provision in parts of the overall system are governance system--and provide a straight- attractive. In countries where there is little sign forward basis for support. of political commitment to improve gover- Given this set of challenges, how might the nance and capacity, opportunities at the local international community scale up flexible level will need to be identified. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 17 Part I Monitoring Progress 1 Charting and Sustaining Progress in Income Poverty Reduction T he first Millennium Development Goal pain from persistently high oil prices. Weak- (MDG) calls for the development com- nesses in developing-country institutional and munity to reduce the global rate of policy frameworks (such as financial sector extreme income poverty--measured by the vulnerabilities) also pose risks, and high com- share of the population living on less than $1 modity prices have helped make possible per day--by half between 1990 and 2015. delays in needed fiscal adjustment and struc- Current trends suggest that if the developing tural reform. Continued rapid poverty reduc- world can maintain the growth momentum tion will therefore depend on further steps by of the past 15 years, it will meet this MDG. developing countries to consolidate domestic Numerically, the reduction in the global sources of growth, as well as the promotion of poverty rate owes the most to impressive equity. advances in China and India, but it has also This chapter reports on efforts to track been helped by acceleration in income growth progress in two areas related to growth: elsewhere in the developing world in recent improvements in access to and quality of infra- years. The past year has seen strong growth structure, and promotion of an investment cli- and poverty reduction in much of the develop- mate conducive to private sector growth. These ing world as a result of improved developing- policies make sense under any circumstances, country policies and a global environment but they take on special importance when the conducive to growth. global environment is already very favorable Thanks to these improvements, the long- by recent historical standards. term prospects for growth and income- poverty reduction appear good in most regions. Perhaps most notably, low-income Poverty Reduction and Growth: countries are projected to continue their Positive Trends, Significant rebound from their stagnation and contrac- Challenges tion of the early 1990s by growing at an aver- Progress on Poverty Reduction age of well over 3 percent per capita in 2006. There are risks to the forecast, of course: the The developing world as a whole is predicted perennial but very real risks of abrupt adjust- to meet the poverty MDG. The latest projec- ments in global external imbalances and sharp tion is that the share of developing-country increases in interest rates, newer threats like population living on under $1 per day will fall an avian flu pandemic, and a risk of deeper from 27.9 percent in 1990 to 10.2 percent in G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 21 C H A P T E R 1 2015. By 2002, roughly halfway through the 1990s. The most discouraging news on goal period, the share had already fallen to poverty comes from Sub-Saharan Africa 21.7 percent. Although more recent global (SSA), the region with the highest share of its poverty estimates are not yet available (due to population in poverty in 1990. In 2002 the lags in availability of household survey data), share fell slightly to 44.0 percent, which is the relatively robust income growth of recent significantly below the 46.4 percent in 2001 years has increased the likelihood that the tar- but virtually the same as in 1990. And current get will be attained. projections are that in 2015 Africa's poverty But the news on poverty is far from unam- rate will remain over 38 percent--far above biguously positive. While the poverty decline the 22.3 percent target. in the East Asia and Pacific (EAP) region has The estimates in figure 1.1 are updated been extremely rapid, no other region has only through 2002, the last year for which seen such rapid progress (figure 1.1). South household survey data are available for Asia (SA) has made strong improvements too, enough countries to allow regional and placing it roughly on the path to meet the tar- global estimates. However, it is possible to get. But Europe and Central Asia (ECA) saw "project" the evolution of poverty through a sharp increase in its low rate of poverty as 2005 by combining the most recent house- a result of the transition recessions of the hold survey data available with data on FIGURE 1.1 Progress toward the Poverty MDG Target, 1990­2002, and a forecast for 2015 East Asia & Pacific (EAP) Europe & Central Asia (ECA) Latin America & the Caribbean (LAC) Percent of population living on less than $1 a day 50 50 50 40 40 40 29.6 30 30 30 20 14.8 20 20 11.3 8.9 10 10 10 11.6 6.2 2.1 0.7 0.5 0.9 5.7 0 0 0.3 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Middle East & North Africa (MENA) South Asia (SA) Sub-Saharan Africa (SSA) Percent of population living on less than $1 a day 50 50 50 44.6 44.0 41.3 38.1 40 40 40 31.2 30 30 30 20.7 22.3 20 20 20 10 10 13.8 10 2.3 1.6 1.2 0 0.7 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 2002 2015 Goal Actual Projected Path to goal Source: World Bank Staff estimates. 22 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N growth rates of real per capita incomes and tries remains below the level needed for them assumptions about income distribution. to achieve the MDGs. In the low-income These projections should not be regarded as countries of SSA, per capita growth was estimates, but they give some idea of how about 3 percent for the second straight year recent rapid income growth may have trans- in 2005, despite continuing conflicts and peri- lated into lower poverty.1 odic weather shocks. This growth is a marked The projections suggest that poverty rates improvement on the 1995­2004 SSA low- may have fallen in all regions since 2002. In income country growth average of about 1.3 three regions, the rate has probably declined percent, not to mention the income declines by 2 to 4 percentage points--to a projected of the early 1990s. In SA, LICs other than 8.8 percent in EAP, 27.5 percent in SA, and India grew at a strong 4.8 percent, nearly 41.4 percent in SSA. These advances leave matching India's rapid growth. By contrast, unchanged the conclusions above: on current the few LICs in the largely middle-income trends, EAP and SA will likely reach the Latin America and Caribbean (LAC) region MDG for income poverty, while Sub-Saharan and the Middle East and North Africa Africa will not, despite the recent acceleration (MENA) region grew more slowly. in growth in the region. In the other three As noted in Global Monitoring Report regions (Europe and Central Asia, Latin Amer- 2004 and Global Monitoring Report 2005, ica and the Caribbean, and Middle East and macroeconomic policies in low-income coun- North Africa), where initial poverty rates were tries have improved greatly over the past 15 lower, poverty likely dropped by less than 1 years. These improvements were largely sus- percentage point between 2002 and 2005. tained in 2005. High oil prices contributed to an up-tick in inflation in low-income coun- tries, but inflation rates in 2005 remained at Improvements in Long-Term Growth roughly half the level of the early 1990s. Continued poverty reduction depends on sus- Other indicators--fiscal deficits, external tained growth, and here the picture is a posi- debt, and debt-service ratios--remained on tive one. Most regions have good long-term average well below 2000­4 levels, and in fact growth prospects and strong recent perfor- lower than they had since the 1980s.3 Over mance, thanks to improvements in macro- the coming year, improvements in macroeco- economic policies over the past two decades. nomic indicators are expected to continue In general, policies that contribute to macro- (table 1.2). economic stability help sustain growth, International Monetary Fund (IMF) staff whereas those that promote instability, such assessments suggest that in low-income coun- as inflationary monetary policies and fiscal tries, efforts to improve macroeconomic poli- policies that lead to high budget deficits, tend cies and governance have achieved results, to to hurt growth by deterring private invest- a point (table 1.3).4 In the areas of monetary ment. Macroeconomic policy making will policy and exchange-rate regimes, 70 to 80 likely face new challenges as levels of official percent of low-income countries are now development assistance (ODA) to developing rated as having good policies. On macroeco- countries are scaled up. nomic policy consistency and financial sector Per capita GDP growth in low-income governance, too, the news is positive: less countries (LICs) was higher in 2005 than the than a fifth of countries are rated as unsatis- average for any five-year period since the late factory. By contrast, fiscal policy and espe- 1970s, and the strong growth is expected to cially composition of public spending are continue (table 1.1).2 This trend is encourag- viewed with greater concern. ing, particularly when contrasted with the The assessments also confirm that among low per capita growth seen in the early 1990s, low-income countries, those with higher even though economic growth in many coun- growth rates tend to have better macroeco- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 23 C H A P T E R 1 TABLE 1.1 Per capita GDP growth in low- and middle-income countries (by region) 1985­9 1990­4 1995­9 2000­4 2003 2004e 2005f 2006f 1.9 0.8 1.8 1.6 1.6 2.9 2.0 2.1 Memo item: World (PPP weights) b 3.8 2.3 3.4 3.8 3.9 5.0 4.4 4.4 High income 3.0 1.5 2.2 1.6 1.4 2.7 1.9 2.0 Low-income countries 2.4 1.4 3.3 3.2 5.1 4.5 5.3 4.7 East Asia and Pacific 0.9 4.6 5.0 5.0 4.2 5.5 6.1 5.2 Europe and Central Asia 1.4 ­14.4 ­0.7 4.9 6.3 6.7 3.2 4.5 Latin America and the Caribbean ­4.0 ­4.0 1.7 0.0 ­0.2 1.3 1.5 0.6 Middle East and N. Africa 8.1 ­1.6 3.3 0.6 0.0 ­0.5 0.4 0.3 South Asia 3.6 2.7 4.0 3.7 6.1 5.1 5.4 4.8 Excluding India 2.2 2.1 1.7 2.5 3.0 4.2 4.8 3.8 India 4.0 2.8 4.6 4.1 6.9 5.3 5.5 5.1 Sub-Saharan Africa 0.2 ­1.8 1.1 1.4 2.5 2.9 3.0 3.8 Middle-income countries 1.5 1.2 2.7 4.0 4.5 6.3 4.9 4.6 East Asia and Pacific 6.4 8.1 5.9 7.1 7.9 8.2 7.4 7.1 Excluding China 3.8 5.5 1.0 3.4 3.9 4.6 3.0 3.7 China 8.2 9.6 8.1 8.4 9.3 9.4 8.6 8.0 Europe and Central Asia 1.3 ­5.8 1.8 5.4 6.0 7.3 5.2 5.0 Latin America and the Caribbean 0.2 1.7 0.9 0.8 0.5 4.5 3.1 2.5 Middle East and N. Africa ­1.0 1.8 2.0 2.9 3.3 3.2 3.1 3.7 South Asia 1.5 4.3 3.9 3.0 5.1 4.5 3.5 4.8 Sub-Saharan Africa ­0.4 ­2.4 1.1 2.3 1.8 3.0 3.6 3.3 Developing countries 1.4 0.9 2.5 3.6 4.3 5.7 4.7 4.5 Excluding transition countries 1.7 3.0 2.7 3.4 4.1 5.6 4.7 4.4 Excluding China and India 0.3 ­0.7 0.9 2.1 2.3 4.5 3.4 3.3 Source: World Bank staff estimates. Note: PPP = purchasing power parity; e = estimate; f= forecast. a. GDP in 2000 constant dollars; 2000 prices and market exchange rates. b. GDP measured at 2000 PPP weights. nomic policies, a relationship previously doc- performance outside the East Asia and Pacific umented in Global Monitoring Report 2004. region: ECA's middle-income countries have They also indicate that countries with better made a strong recovery from the transition macroeconomic policy indicators tend to shock of the 1990s, and their growth once have better governance in related areas. In again exceeded 5 percent in 2005, as it did for particular, countries with good public sector the 2000­4 period. Middle-income Latin and monetary governance are more likely to America and Caribbean countries, which have lower inflation and external debt-to- recorded little increase in per capita incomes GDP ratios. over the previous decade, managed growth of In 2005 middle-income countries (MICs) over 3 percent, despite a drop-off from 2004. enjoyed continued rapid income growth, The indicators of macro policy suggest that building on the strong performance of the these improvements were supported by better previous year. Although China pulled the macroeconomic policies in MICs (table 1.2). average up with its per capita growth of over However, this advantage has been blunted by 8 percent, all six regions experienced rapid the risk and frequency of financial crises, average MIC growth, at over 3 percent. which have also made poverty alleviation Europe and Central Asia had the strongest more difficult. And despite the rising incomes 24 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N TABLE 1.2 Macroeconomic indicators for low- and middle-income countries (by region) (Annual averages, except where indicated)a 1985­9 1990­4 1995­9 2000­4 2005 est. 2006 proj. Inflation (median annual %)b Low-income countries 6.7 13.3 8.4 5.0 7.3 5.5 Middle-income countries 9.2 17.7 8.1 4.6 4.2 4.8 Current account balance (% GDP) Low-income countries ­6.4 ­8.0 ­7.6 ­6.0 ­5.7 ­5.0 Middle-income countries ­1.9 ­1.3 ­4.4 ­2.0 ­2.1 ­1.8 External debt (% of GDP) Low-income countries 76.3 98.9 97.2 101.9 90.5 88.2 Middle-income countries 44.8 46.6 43.8 47.8 42.4 40.5 Fiscal balance (% of GDP) Low-income countries ­6.5 ­7.0 ­4.9 ­4.3 ­1.0 ­0.6 Middle-income countries ­3.8 ­2.7 ­3.1 ­3.1 ­1.1 ­1.0 Source: IMF World Economic Outlook (WEO) database (Winter 2006 Board version); staff calculations. a. Averages are calculated as unweighted means of country values b. Median inflation is calculated from the annual medians and then averaged over five-year periods. TABLE 1.3 Quality of macroeconomic policies in low-income countries, 2005 Share of countries falling into each category (percent) Governance/ transparency Composition Consistency in monetary Foreign of public Monetary of macro and financial exchange Rating Fiscal policy spending policy policies institutions regime Unsatisfactory 26 61 11 16 18 7 Adequate 26 28 19 40 25 13 Good 48 11 70 44 57 80 Source: IMF staff assessments. of these countries, poverty reduction in lag- ratios will remain high in many countries and ging regions remains very much a concern will need to be reduced further. Second, there (box 1.1). has also been a clear shift among emerging There has been significant progress in market economies toward more flexible making the middle-income economies, and exchange rate regimes. Such increased flexi- particularly emerging-market economies, more bility in exchange rates can help mitigate the resilient to economic shocks. First, on aver- real impact of crises, to the extent that real age, current account deficits relative to GDP exchange rate depreciation offsets some of have fallen since the late 1990s, and this trend the real effects of falling aggregate demand. is projected to lead to lower external debt-to- Third, financial sectors in middle-income GDP ratios, which should help reduce the countries have become somewhat sounder, in likelihood of debt crises. Nevertheless, debt part because reputable international banks G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 25 C H A P T E R 1 BOX 1.1 Lagging regions in middle-income countries and progress toward the MDGs Extreme poverty and deprivation is not confined to low-income countries. Middle-income coun- tries remain home to a large share of the world's poor people, especially of those who live on less than $2 per day. Much of this poverty lies in subnational regions where income and social indica- tors severely lag national levels. Household incomes in Brazil's northeast remain below half of the national average, in spite of programs to accelerate development there over the past half-century. The Turkish government faces a major challenge in eastern Anatolia, where life expectancy is nearly 10 years below that of the affluent western region, and the rate of underweight children is twice as high. Many other MICs confront similar problems; witness China's western region, Thailand's northeast, and Mexico's southern states. Lagging regions of MICs confront many of the same development issues that low-income coun- tries do. Many struggle with geographic isolation and poor integration with national markets, com- pounded by poor infrastructure. Lagging regions have often depleted their resources, leaving them a weak productive base for traditional activities. Governance is often far weaker than elsewhere, darkening the investment climate and undermining service delivery; social conflict and lack of secu- rity can raise costs and further undermine the capacity to attract investment. For these reasons, regional MDG indicators often reveal a large agenda for action in middle- income countries. Donors and international financial institutions (IFIs) have given increased atten- tion to the special institutional challenges involved in supporting subnational reforms in lagging regions. Subnational policy-based lending was introduced in the 1990s, but more innovative work is needed to address these issues in MICs. One promising development is the recent initiative to intro- duce joint International Finance Corporation (of the World Bank Group)-International Bank for Reconstruction and Development (IFC-IBRD) financing for infrastructure investments by subsover- eign borrowers. Although the World Bank made more than $4.5 billion in loans with sovereign guar- antees for subnational infrastructure projects in fiscal 2005, the Bank Group's only instrument to offer financing to these subnational borrowers without sovereign guarantees is IFC's Municipal Fund. The new approach would combine the strengths of both the IFC and Bank approaches. have taken on an increased role in Eastern 1 percent increase in the real GDP of advanced Europe and Latin America. However, indica- economies was associated with a 0.4 percent tors of financial soundness suggest that room increase in the real GDP of developing coun- for improvement remains in many countries. tries, although the relationship was much weaker for primary commodity exporters (IMF 2001: 80). Policies that encourage Short- to Medium-Term Outlook: developed-country growth can thus improve Sustained Growth, but with Risks prospects for achieving the MDGs. What rates of growth and poverty reduction Developed-country GDP growth is pro- can developing countries expect over the jected to remain robust over the near to short to medium term? The answer depends medium term. After averaging a respectable substantially on the pace of economic expan- 2.7 percent in 2004 and an estimated 1.9 per- sion in the advanced economies. Rapid rich- cent in 2005, growth is projected to increase country growth increases trade and facilitates slightly in 2006. The United States is expected higher aid flows, and it can also affect devel- to remain the main driver of the expansion, oping countries through its impact on private but increased support will come from Europe. financial flows, labor migration, and remit- Average advanced-economy inflation rates (at tance flows. On average, in 1971­2000, a 2.3 percent) and fiscal deficits (at 3.1 percent 26 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N of GDP) are projected to remain moderate. fact that higher prices were mainly due to This outlook is consistent with continued increasing global demand spurred by growth high growth in exports from developing rather than to supply shortfalls. For oil- countries and reasonably constant terms of importing developing countries, increases in trade (table 1.4). aid, together with increased prices on other This forecast incorporates the assumption commodity exports, have helped cushion the that global interest rates will not rise blow, so that their GDP growth dropped only abruptly. Financial markets are relatively slightly in 2005. Nevertheless, gross national calm at present, but a sharp rise in interest income (GNI) growth for those countries fell rates could weaken consumer spending in sharply, from 6.3 percent in 2004 to an esti- developed countries and threaten the most mated 3.7 percent in 2005, and further vulnerable emerging-market economies, such adjustments are likely to come. Moreover, as those with high debt ratios and short debt many large emerging market economies have maturities. The forecast also assumes there not yet allowed domestic gasoline prices to will be no need for a sudden adjustment in rise enough to reflect the price increases; in global current account imbalances--includ- the advanced economies, the consumer may ing the U.S. external current account deficit, only now realize that high oil prices are which has deteriorated from $416 billion in largely permanent and require a cutback in 2000 to $798 billion in 2005. If the demand household budgets. The impact of higher oil for U.S. assets were to decline sharply, the prices on private investment may also take ensuing U.S. contraction could spark a global some time to emerge fully. In addition, the recession. decline in the price of oil in late 2005 was at These risks have received considerable least partly due to the combination of mild attention in macroeconomic forecasts in weather and oil reserve releases; hence the recent years, but the generally positive decline may not be sustainable. medium-term scenario could also be derailed Oil prices are expected to average between by newer risks. First, the recent rise in the $55 and $60 a barrel for the next two years, price of oil and the current tightness of the oil and further increases in oil prices cannot be market pose dangers. By September 2005 oil ruled out, as excess capacity among producers prices had increased by over 50 percent com- of the Organization of Petroleum Exporting pared to end-2004, and they fell only moder- Countries is limited and the market remains ately in the last quarter. Thus far, the impact vulnerable to supply shocks. Disruptions in of higher oil prices on global growth has been oil supply could seriously depress future relatively minor overall, in part reflecting the developing-country growth in much the same TABLE 1.4 Global economic environment and developing countries (Annual percent change unless otherwise indicated) 1995­9 2000­4 2005e 2006f World trade (average) 7.4 6.3 7.4 8.0 Developing countries: Volume of exports of goods and services (average) 8.0 9.7 10.9 10.3 Terms of trade (average) 0.2 1.6 5.4 1.7 Fuel exporters 3.4 8.8 23.4 8.3 Nonfuel exporters ­0.5 ­0.3 ­0.1 ­0.4 Source: WEO, Winter 2006 Board Version. e = estimate, f = forecast. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 27 C H A P T E R 1 manner as the oil supply shocks of the 1970s, of infrastructure. The availability of high especially if prices of other commodities quality infrastructure services in key areas-- weaken. Countries will need to adjust to per- such as water, sanitation, electricity, telecom- manently higher oil prices, most notably by munications, and transport--not only promotes increasing energy efficiency and avoiding growth and poverty reduction but also spurs price controls that drain public finances. progress toward the human development A second major new risk is economic dis- MDGs (see chapter 2). The choice to monitor location caused by avian influenza. In addi- these two areas in depth inevitably means a tion to the terrible toll that it could exact in choice not to focus on other areas; box 1.2 human lives, an influenza pandemic could discusses some important areas related to prove a serious threat to the global economy. poverty reduction that are not otherwise cov- Countries that depend heavily on interna- ered in this chapter. tional tourism and that lack adequate public health and medical facilities, or that are at Improving the Investment some risk of capital flight being triggered by Climate: Contribution an outbreak, are particularly vulnerable. of Better Analysis Therefore, action to neutralize the epidemic's potential for economic dislocation--for The quality of the investment climate con- example, funding for culling birds and com- tributes strongly to growth, productivity, and pensating farmers--is urgently needed. The employment creation--all of which are essen- budgetary cost to low-income countries of tial for sustainable reductions in income programs to prevent or impede the spread of poverty. Data on the quality of the investment the disease and manage the treatment of the climate can thus serve as a leading indicator sick will prove difficult to finance without for poverty reduction. In the past several external assistance. It is in the global interest years, the World Bank and its partners, that the countries at the front line of this dis- including other multilateral development ease be able to react quickly and decisively. At banks, have increased collection of data on the January 2006 ministerial conference in the investment climate quality in many coun- Beijing, the international community took a tries. The new data are translating into con- key step toward making this happen by crete policy recommendations. pledging $1.9 billion to fight avian flu. Analysis to Improve the Business Climate Implications for Developing Countries The World Bank produces quantitative mea- To sustain their progress in accelerating surements of the investment climate using growth and poverty reduction since the 1980s, two major vehicles: the Investment Climate developing countries will need to increase their Surveys (ICS) and the Doing Business (DB) economies' resilience and reduce vulnerability surveys. The two are complementary; the ICS to cyclical downturns. They will also need to draw their data from firms, and the DB sur- make major progress along other dimensions. veys rely on experts. Together, these surveys The remainder of this chapter covers two map out much of the terrain that developing- of those dimensions. First, it reviews devel- country entrepreneurs must navigate as they oping countries' progress on monitoring seek to invest in and expand their businesses. and improving the investment climate for They help countries to identify major bottle- private sector growth and productivity. Sec- necks to private sector growth and to con- ond, it highlights a key component of that centrate their reform efforts on the areas with business climate: the quantity and quality the biggest potential payoffs. 28 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N BOX 1.2 Beyond improved investment climates and infrastructure The investment climate in general and infrastructure in particular are far from the only important areas to monitor for spurring growth and poverty reduction. Investment to raise agricultural pro- ductivity is essential, especially given that the majority of the world's poor still live in rural areas. Better rural infrastructure and investment climates constitute part of the story of improving agri- culture, but there are many other factors--such as freer international trade in agricultural products, greater competition in agricultural input markets, and more research and development in tropical agriculture. Another potentially important mechanism for promoting growth, through increased competitive pressures and reduced production costs, is greater engagement in international trade; progress in this area is discussed in depth in chapter 3. More generally, growth-targeted policies will need to be complemented by measures to promote equity. When people are denied equal opportunities--whether in access to education, health, finan- cial systems, justice, or the political process--their talents and productive capacity are wasted, and society as a whole suffers. Expanding opportunities for those who have the least is thus not only a desirable end in itself, but also an important instrument for achieving growth and poverty reduc- tion. A focus on equal opportunity therefore implies monitoring and acting to remove the factors limiting shared growth, as discussed in detail in World Development Report 2006. What does this mean in terms of actual policies? In finance, a concern for equity may mean bal- ancing the focus on financial stability and performance of well-served clients with approaches to expand financial access to underserved clients. In education and health, it may mean using vouch- ers or conditional cash transfers to boost the effective demand of excluded groups. In private sec- tor development, it requires addressing the constraints on informal and small-scale rural enterprises, not just those on larger-scale formal firms. In power, it may mean complementing efforts to extend the electrical grid with smaller-scale decentralized mechanisms for providing electricity. In all sec- tors, it means monitoring how economic and social trends and policies affect excluded and disad- vantaged groups. Monitoring trends in income poverty is a start--but only a start, in that monitoring of outcomes has to be accompanied by measuring and analyzing processes that lead to those outcomes. Finally, policies should be aimed at promoting growth that is sustainable. If countries meet the poverty MDG target by mining soil fertility and depleting natural resources at excessive rates, improvements may not be sustained. This is a key concern of the MDG on environmental sustain- ability. One way to analyze sustainability is to look at measures of "adjusted net saving"--that is, saving adjusted for consumption of resources. This metric raises real concerns: in low-income coun- tries, adjusted net saving has fallen from 7.6 percent of GNI in 1999 to 6.5 percent in 2004, while in middle-income countries, it has dropped sharply from 14.3 percent to 8.9 percent, owing partly to consumption of oil rents in petroleum-producing states. Beyond this concern, current environ- mental risks also reduce the prospects for meeting MDG targets. For example, low-income coun- tries depend on biomass fuels for nearly 50 percent of their total energy, but the resulting indoor air pollution leads to high rates of death and illness. Low-income countries also faced urban air pollu- tion levels (in terms of particulate matter less than 10 microns, a major health hazard) that are on average 70 percent higher than World Health Organization standards in 2002. Moreover, policies and institutions dealing with the environment and natural resources are generally rated as weak in developing countries, raising particular concerns as countries and donors contemplate major infra- structure investments. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 29 C H A P T E R 1 As discussed in previous Global Monitor- Analysis for Action: Identifying Sources of ing reports, the ICS collect data from firms on Higher Business Productivity and Growth both objective and subjective indicators cov- The new data from the ICS and DB surveys ering a wide range of investment climate have strengthened the analytical basis for dimensions. In the past year, the surveys were action and increasingly make it possible to fielded in over 35 countries, bringing the total assess progress in improving the business to 75 countries. Moreover, a second round of climate. surveys has begun in countries that were first surveyed three years ago, thereby allowing analysis of the effect of changes in the invest- I M P R O V E M E N T S T O T H E I N V E S T M E N T ment climate and specific policies on firm per- C L I M A T E C A N B E S U B S T A N T I A L formance. Research based on the ICS not only reinforces In 2005 the surveys also expanded by the importance of the business environment as including more service-sector firms and more a determinant of competitiveness, but also of the informal enterprises that employ many points to specific areas for reform. It is not poor people. Under a protocol signed in enough for a firm simply to have the right March 2005, the multilateral development technology, or efficient management, or banks (MDBs) will conduct the surveys skilled employees. Certainly productivity on jointly, increasing cost-effectiveness and the factory floor matters, but advantages in potential policy impact. The collaboration this area can be offset, even swamped, by began successfully with the European Bank excessive costs associated with poor access to for Reconstruction and Development and infrastructure and financial services, or weak World Bank surveying all the ECA countries property rights and governance (Hallward- in 2005; now all 27 ECA countries have been Driemeier and Smith 2005). In both low- surveyed more than once. income and middle-income countries, The findings of the DB surveys (analyzed understanding the climate for firm productiv- in the World Bank's annual Doing Business ity and growth is essential. reports) are based on responses to standard- Much of the development community's ized surveys of experts from 155 countries. attention is focused on maintaining and This year the surveys will cover 20 additional accelerating growth in low-income coun- small states. The surveys address 10 areas of tries, located primarily in Africa. One key regulation: starting a business, dealing with question is why productivity is so low in licenses, hiring and firing workers, registering much of Africa compared with that in India property, getting credit, protecting investors, and China. Analysis of ICS data shows that paying taxes, enforcing contracts, trading some of the disparity stems from differences across borders, and closing a business. in labor productivity, but that high indirect Experts answer questions in their area of costs and business-environment­related losses expertise on the basis of their experience also significantly depress the productivity of operating within the regulatory system. Most African firms relative to that of firms in other respondents are from the private sector and countries. are either lawyers or accountants who deal Is it reasonable to expect improvements in frequently with rules and their enforcement. investment climates in low-income African The surveys ask only objective questions--for countries? Consider evidence on the differences example, what steps are necessary to register among African countries. Even as the region as a new company, how many days each step a whole lags behind, some African economies takes, and how much time each step takes-- show evidence of a more productive business producing quantitative indicators for busi- community and better business climate. South ness regulations that can be compared across Africa, a middle-income country, sets a stan- countries and over time. dard for the region; yet as box 1.3 illustrates, 30 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N the ICS identify constraints on firm produc- ers. At the bottom end, firms in Zambia and tivity even in its relatively well-functioning Mozambique--and to a lesser extent those in business environment. Among LICs, Senegal Nigeria and Ethiopia--have relatively weak shows what an African country can achieve factory-floor productivity, and their value- with a strong business community and a rela- added is heavily squeezed by high business- tively good business environment. In Kenya, a environment costs (Eifert, Gelb, and long history of entrepreneurship is reflected in Ramachandran 2005). strong potential factory-floor productivity, Local governance is often as important as but high investment-climate-related costs national governance in determining the impede competitiveness. Uganda and Tanza- investment climate. Some policies are set at nia appear to be middle-of-the-road perform- the local level, and even when policies are BOX 1.3 Improving the investment climate in South Africa Starting from a strong fiscal position, the South African government is aiming for accelerated and shared growth of 6 percent by the end of the decade. Conditions for such rapid growth look favor- able. By comparison with firms in other countries, few South African firms rated investment climate constraints as major obstacles to growth. Most firms believe that the courts are able to protect their property, that losses due to power outages are relatively small, and that tax rates are reasonable and are declining. Although the burden of regulation is not particularly low, it is comparable to that in most middle-income countries: on average, senior managers spend 10 percent of their time dealing with regulatory requirements, much less than in China and Lithuania (25 percent). Yet investment remains low. Reform is still needed in four areas: Wages, particularly for skilled workers, are high by international standards, eroding competi- tiveness. Workers' skills were identified as a serious obstacle by more managers than were any other area of the investment climate. Firms must pay a particularly high premium for skilled and educated workers. The median monthly wage for an unskilled production worker in South Africa in 2002 was about $240 a month compared with $250 a month in Poland and $167 a month in Brazil. Yet the median monthly wage for a manager in South Africa was about $1,850 a month, over twice as high as in Poland ($740 a month) and over three times as high as in Brazil ($540 a month). Rigid labor regulations discourage firms from hiring new workers. Nearly one-third of enter- prise managers said labor regulations were a serious problem. Other indicators support this con- cern, suggesting that labor regulation is more rigid in South Africa than in many other middle-income countries. In Doing Business 2006, South Africa ranked 28th in the world overall on ease of doing business, but only 66th on regulations related to hiring and firing workers. Macroeconomic instability raises uncertainty, particularly for exporters. Macroeconomic insta- bility was rated as a serious obstacle by about 33 percent of South African firms. At first this find- ing seems puzzling, because inflation has been modest and macro fundamentals have been steadily improving. But exchange rates have been volatile, especially against the dollar. Close to three-quar- ters of enterprises that export to the United States, the country whose currency has been most unsta- ble against the rand, rated macroeconomic instability as a serious obstacle. The cost of crime is higher in South Africa than it is in many of its competitors. For the median firm, direct losses due to crime and the cost of security were about 1.1 percent of sales. Although lower than in the countries most affected by crime, this rate is higher than in many middle-income countries: losses from crime were less than 1 percent of sales in China, Poland, Brazil, and even Rus- sia. Security costs accounted for about two-thirds of the cost of crime, while direct losses accounted for the other third. Sources: Clarke and others 2005; Kaplan and Ramachandran 2005. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 31 C H A P T E R 1 national or regional, local officials who to be the large and expanding firms that are implement and enforce them often have con- targets of corruption (World Bank 2005b). siderable discretion. By covering multiple ICS data also help identify potential locations within a country, the ICS make it sources of innovation, a key source of pro- possible to measure just how important the ductivity and income growth. New research local investment climate is in determining shows that greater competitive pressure on a productivity. The answer is often "quite firm is generally associated with higher rates important." Within Morocco, for example, of innovation by the firm, as measured by total firm productivity (TFP) differences rates of introduction of new products and across regions owe much more to the effects processes. There is some guidance for policy of local investment climates than to the com- makers here: the same evidence indicates that bined effects of two other key factors in pro- such benefits are more likely to be realized ductivity: agglomeration economies and through more effective enforcement of com- natural geographic advantages (Mengistae petition laws than through lower tariff barri- and Thompson 2005). And in South Asia ers (Clarke 2005). and China, investment climate measures Finally, ICS data identify labor market reg- explain up to 80 percent of the differences in ulation as an important determinant of firm productivity, even controlling for measures performance and behavior, including deci- of economic geography (Dollar, Hallward- sions to hire and train workers. Evidence Driemeier, and Mengistae 2005; Lall and from Brazil and China shows that greater Mengistae 2005). A similar result was found flexibility can boost productivity, enable with respect to the role of investment cli- more innovative firms to grow, and reduce mate indicators in facilitating greater inter- the incentive to shift employment to informal national integration in Asia and in Latin workers (Almeida and Carneiro 2005; Dollar, America (Dollar, Hallward-Driemeier, and Wang, Xu, and Shi 2005). Mengistae forthcoming). More reliable Thanks to the new repeat surveys for the infrastructure services, access to finance, and 27 ECA countries, it is possible to diagram less onerous regulatory burdens help firms how the investment climate is changing in grow faster and facilitate entry into export that region (figure 1.2). Overall, the picture markets. Workers also benefit: a better suggests progress, with noticeable improve- investment climate is associated with both ments in survey indicators of crime, corrup- higher wages and greater job creation. tion, and especially policy uncertainty. Corruption matters. Uncertainty of regula- tory policies and their enforcement continues D O I N G B U S I N E S S U P D A T E : E A S T E R N to rank as one of the top constraints reported E U R O P E R E F O R M S T H E M O S T , A F R I C A by entrepreneurs. Almost 95 percent of firms T H E L E A S T report that "at least some of the time" there is Data from the Doing Business surveys comple- a gap between formal regulations and the way ment the ICS data in describing the landscape they are enforced. Discretion and frequent for firms by focusing on the regulatory costs of interactions with officials are both associated opening and operating businesses. New busi- with a higher incidence of demands for "addi- nesses are a vital source of economic growth tional payments" (typically a euphemism for and jobs in any country. Yet the DB surveys bribes). In Bangladesh, for example, 85 per- show that poor countries place the highest bur- cent of firms report that tax inspectors expect dens on entrepreneurs, loading them down to receive "gifts" during meetings, and that with administrative hassles that divert energy payments equivalent to 2.5 percent of sales are from running the business. Poor countries also paid to help "get things done." By comparison, reform their business regulations the least. only 10 percent of firms report paying "gifts" In 2004 the DB surveys showed that more in Latvia or Slovenia. In many cases, it appears reform took place in Eastern Europe and 32 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N Central Asia than in any other region; every FIGURE 1.2 Evolution of investment climate indicators in Europe and ECA country took at least one step to make Central Asia, 2002 and 2005 things easier for business (figure 1.3).5 Two ECA countries, Serbia and Montenegro and Percent of firms who report constraints as major or very severe Georgia, topped the global rankings for most Policy uncertainty reforms enacted. At the other end of the scale, Telecommunications Tax rates Sub-Saharan Africa reformed the least as a region. By the Doing Business metric, African countries averaged only around 0.6 reforms Access to land Cost & access per country in 2004, and for every three 50 to finance African countries that improved regulations 25 for business, another country made it more Electricity Corruption burdensome to do business. Some African countries are acting to improve their business environment. Rwanda Crime Legal introduced sweeping reforms over the last few years to make it easier for entrepreneurs Regulation & tax administration to start and run their businesses. Land titling 2002 2005 reform followed new company and labor laws, and the country has benefited from Source: World Bank Investment Climate Surveys. streamlined customs procedures and better Note: The graph does not include every country in the region. Points closer to the center are better. credit information. Nigeria reformed in three areas in 2004--company startup, labor regu- lation, and credit information. These exam- ples need not be isolated. In addition, several African countries are already providing good regulatory environ- FIGURE 1.3 Doing Business reform intensity in 2004 by region ments for business. Mauritius and South Africa both rank in the top 30 economies Reform intensity globally on the ease of doing business; Namibia is not far behind at 33rd. All coun- Sub-Saharan tries need to regulate enterprises to promote Africa worker safety, environmental goals, social Middle East protection, and other goals, but these coun- & North Africa tries do so in ways that are less burdensome East Asia to business. Doing Business in 2007 will fea- & the Pacific ture 50 reform cases, including 9 from Africa that could serve as best-practice examples for South Asia would-be reformers. Latin America The payoff from easing regulation is large. & Caribbean Doing Business in 2005 showed that more OECD complex regulations are associated with lower high-income growth rates. Doing Business in 2006 finds countries they are also associated with higher informal- Europe & Central Asia ity; or, to put it more positively, where regula- tions are simple, jobs are more likely to be 0 20 40 60 80 100 created in the formal sector. Reaching the top Percent of countries with at least one reform in 2004 quartile of performance, as measured by the Doing Business indicators, is associated with Source: Doing Business Database. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 33 C H A P T E R 1 FIGURE 1.4 The informal sector and the ease of doing business in 2004 Informal sector as a share of GDP Potential reduction in the informal sector Percent Percent 50 45 40 Potential 40 35 reduction 30 30 25 20 Informal 20 15 sector after 10 10 reduction 5 0 0 Least difficult Most difficult Least difficult Most difficult Countries ranked by ease of doing business, Countries ranked by ease of doing business, quintiles quartiles Source: World Bank 2006a; Doing Business database; Schneider 2005; WEF 2005. Note: Relationships are significant at the 1% level and remain so when controlling for income per capita. a 9-percentage-point fall in the share of GDP needs, and increased welfare in general. This accounted for by informal activity (figure 1.4). section tracks changes in infrastructure avail- More formal jobs mean that more workers are ability and quality in the developing world, protected by pensions, safety regulations, and and it explores their implications for moni- health benefits. Women, who make up three- toring and spurring improvements in infra- quarters of the workforce in some developing structure services. economies, are big beneficiaries of regulatory reform; so are young people looking for their The State of Infrastructure: first job. Progress, but Not Fast Enough Infrastructure Growth: Despite considerable expansion in the infra- Beyond Treading Water structure critical to meeting the MDGs, rates of household access to infrastructure ser- One key element of the investment climate is vices are not increasing as rapidly as the the quality of infrastructure, which is the numbers would first suggest. First, the good backbone of a functioning economy. As news: infrastructure services are reaching reviewed in Global Monitoring Report 2004, more people in the developing world in the analytical evidence increasingly demon- absolute terms. Between 1990 and 2002, strates the importance of infrastructure for over one billion people gained access to sustaining growth and achieving both poverty improved water supply and sanitation ser- alleviation and development goals. Improving vices.6 Also during the 1990s, the number of infrastructure services to poor households and total telephone subscribers in developing rural areas is central to pro-poor growth agen- countries (expressed in population shares) das. For the economy as a whole, infrastruc- nearly quintupled, from 27 to 129 per 1,000 ture can enhance investment climate and people; it is estimated that between 2000 growth by increasing productivity, bridging and 2005, the number may have tripled markets, and facilitating trade. Beyond that, again to reach almost 400 subscribers per infrastructure services directly benefit house- 1,000 people. Similarly, between 1995 and holds by supplying basic elements necessary to 2004, an estimated 470 million people guarantee quality of life, satisfaction of basic gained access to electricity. 34 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N The situation is less positive than it South Asia is losing ground: improvement in appears from these figures. In many cases, infrastructure and in access to water, electric- access rates have hardly kept pace with pop- ity, and phones has not been quick enough to ulation growth. The failure of infrastructure match the region's 2 percent population to expand on a per capita basis, and to reach growth rate. Figure 1.5 illustrates this by map- a substantially higher share of households, ping infrastructure access rates from 1995­9 could reduce developing economies' growth against those from 2000­4; in three sectors, potential. In countries where infrastructure South Asia languishes below the 45-degree line services are scarce and underdeveloped, the (which represents no change in access rates). potential returns on infrastructure access may As the figure also shows, the Middle East be particularly high.7 region has been a top performer, particularly Among developing regions, infrastructure in telecommunications and electricity, to progress has been most rapid in East and South which more than 15 percent of the population Asia in absolute terms. But in per capita terms, gained access over the last five years. FIGURE 1.5 Progress in household access to infrastructure, 1995­2004 Improved water sources Improved sanitation Percent of population Percent of population with access, 2000­4 with access, 2000­4 LAC UMC 100 100 MENA90% 91% UMC 90 90 LAC EAP85% 83% 80 ECA 77% MENA LIC LMC 80 75% 87% LMC 77% 70 84% ECA SSA 63% 70 SA 71% 60 SA 77% 64% 72% 60 48% 50 50 EAP LIC 40 40 58% 38% 30 30 SSA 20 20 37% 10 10 0 0 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percent of population with access, 1995­9 Percent of population with access, 1995­9 Electricity Phones Percent of population Percent of population with access, 2000­4 with access, 2000­4 MENA 100 LMC 93% 100 88% 90 ECA 90 LAC 99% 80 84% 80 70 70 ECA UMC 60 EAP 60 MENA 54% 55% LMC 50 LIC 61% 50 LIC 45% 44% 40 35% LAC SSA 40 9% SSA 29% 30 27% 30 EAP 5% 20 SA 20 18% 28% 10 10 SA 2% 0 0 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percent of population with access, 1995­9 Percent of population with access, 1995­9 Income categories World Bank regions Source: Staff calculations, based on DHS, LSMS, and various household surveys over the period; see Briceño-Garmendia and Klytchnikova 2006. Note: See figure 1.1 for region codes. LIC = low-income countries; LMC = lower-middle-income countries; UMC = upper-middle-income countries. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 35 C H A P T E R 1 Africa undeniably improved overall access Access Gaps and Vulnerable Groups rates in most infrastructure services, but it still lags behind other regions. Although the Because gains in household access rates have number of telephone subscribers has tripled been modest, large gaps in access persist in African countries, the number of house- between vulnerable and better-off groups. holds with phones remains below 5 percent. These gaps can separate disadvantaged And in other sectors, improvements have groups from the vitality of a growing econ- been modest. From the mid- to late-1990s to omy and prevent them from benefiting and 2002 (latest available data), the average elec- contributing fully. To narrow infrastructure trification rate for the region improved to gaps, it is important to identify vulnerable about 27 percent; this is a significant gain of groups and how to reach them. 5 percentage points, but it still left Africa the Poverty and isolation are twin dilemmas lowest among developing regions. In water that define vulnerability. Information from and sanitation, in absolute terms, Africa has household surveys suggests that in many been the region with the slowest progress, developing countries, modern infrastructure despite some progress in coverage rates. services cater mostly to the highest-income Eastern Europe is losing ground in key quintile of the population. In low-income infrastructure areas. By the early 1990s, countries, access for the rich is significantly Eastern Europe had universal access to most less than universal, and the poor are almost infrastructure services. But since 1995, the entirely excluded from access to modern net- region has suffered a decline of about 5 and work services (table 1.5). 9 percent of the share of population with As for the effects of isolation, a compari- access to improved water and sanitation, son of rural and urban populations suggests respectively, and the quality of the water net- the geographic disparities in infrastructure work has deteriorated significantly (World service provision. Rural populations across Bank 2005b). By contrast, phone access has the developing world tend to have lower rates expanded rapidly, and access to electricity of infrastructure access than urban popula- remains nearly universal. tions do (table 1.6). To take one extreme In Latin America, both coverage and qual- example, 65 percent of urban households in ity of infrastructure have seen sustained low-income countries have access to electric- improvements in the last decade, at least ity, but only 17 percent of rural households according to the usual indicators. And yet as do. Lack of electricity can pose a severe con- with macro reforms in the region, these straint on growth and poverty reduction-- improvements have apparently not yielded the limiting, for example, the growth and expected growth payoff. One reason may be productivity of the off-farm enterprises that that despite the advances, the region has lost are essential to rural development. ground relative to middle-income competitors Policies and investment efforts will need to and peers, particularly in East Asia. Moreover, continue targeting these access gaps and sup- the empirical evidence is now pointing to signs porting vulnerable and isolated groups in of underinvestment--in large part because of rural areas. Yet at the same time, policy mak- public sector cuts to achieve fiscal targets-- ers in the developing world cannot afford to suggesting that Latin America and the ignore the huge infrastructure challenge posed Caribbean may lag further behind competi- by the recent (and forecast) urban expansion tors in infrastructure in years to come (World in the developing world. Over the next 30 Bank 2005a). This region's story has initiated years, the global urban population is forecast discussion about the future growth impact of to increase by almost two billion--and virtu- reductions today in infrastructure invest- ally all of this growth will take place in devel- ments, particularly public sector investments.8 oping countries, particularly in the poorest 36 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N TABLE 1.5 Percentage of households with access to basic infrastructure services, quintile comparison (2000­4, latest observations available) Telephone Electricitya Waterb Sanitationc accessd Country group I V I V I V I V Low-income 9.7 68.7 41.1 78.5 27.2 68.8 3.2 24.5 Lower-middle-income 79.5 99.3 64.5 86.6 48.2 78.7 21.2 66.1 Upper-middle-income 81.4 99.5 76.7 95.0 73.4 96.4 32.0 73.1 Source: World Bank staff analysis; see Briceño-Garmendia and Klytchnikova 2006. a. DHS and HHS--Households reporting access to electricity b. JMP/WHO--Percent of population with access to an improved water source c. JMP/WHO--Percent of population with access to an improved sanitation facility d. DHS/HHS--Households reporting access to a telephone l. poorest quintile V. richest quintile DHS = Demographic and Health Surveys HHS = household surveys JMP/WHO = Joint Monitoring Programme for Water Supply and Sanitation/World Health Organization TABLE 1.6 Percentage of households with access to basic infrastructure services, urban-rural comparison (2000­4, latest observations available) Telephone Electricitya Waterb Sanitationc accessd Country group Urban Rural Urban Rural Urban Rural Urban Rural Low-income 65.1 17.3 82.7 54.9 58.3 27.8 20.9 3.0 Lower-middle-income 90.9 76.6 93.6 73.8 84.3 56.2 57.8 24.4 Upper-middle-income 97.7 76.5 94.1 84.2 88.4 73.7 67.6 41.8 Source: World Bank staff analysis; see Briceño-Garmendia and Klytchnikova 2006. a. DHS and HHS--Households reporting access to electricity b. JMP/WHO--Percent of population with access to an improved water source c. JMP/WHO--Percent of population with access to an improved sanitation facility d. DHS/HHS--Households reporting access to a telephone DHS = Demographic and Health Surveys HHS = household surveys JMP/WHO = Joint Monitoring Programme for Water Supply and Sanitation/World Health Organization regions.9 The economic future of most coun- Caribbean, for example, the roughly 3 percent tries, including those still urbanizing, will of urban population without access to depend on how well their cities function. improved water constitutes about 34 percent Urban expansion is a challenge, but it also of the total unserved population; a similar sit- gives policy makers opportunities with respect uation holds in Eastern Europe.10 to infrastructure bundling and wholesaling, as well as the option of taking advantage of Monitoring Infrastructure Gaps: economies of scope in the production and dis- The Need to Assess Quality tribution of services. Focusing on the unserved urban population may sometimes be the most Where infrastructure services are lacking, efficient approach. In Latin America and the customers often rely on lower quality techno- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 37 C H A P T E R 1 logical alternatives offered by informal service water services quality. From simple questions providers. Monitoring these alternatives is added to a multipurpose household ques- challenging because of the lack of data. As a tionnaire, a household's water service can be result, monitoring has focused on access, which classified according to its safety--that is, is the easiest aspect of provision to measure. whether the service represents improved But qualitative aspects are crucial for infra- technologies like pit latrines or a piped sewer structure provision. Having access to water for system, or unimproved sources such as an 3 hours a day is not the same as having access unprotected spring or surface water.11 But for 24 hours a day; nor is dung equivalent to many other aspects of quality of service (such kerosene as a main cooking fuel. Other crucial as continuity of flow, predictability of flow, dimensions of quality--such as reliability, and availability of water during the dry sea- safety, and customer orientation--should also son) that also determine the degree of be measured. A quality-adjusted access rate is "access" to water and sanitation have not therefore in order. been captured reliably in general-purpose Assessing quality is time-consuming and surveys. Although "dedicated" water and expensive. Consider the water sector. The sanitation surveys can be conducted in indi- World Health Organization and United vidual project areas, they are too expensive Nations Children's Fund have created a and complex to be a routine form of water "technological" taxonomy of one aspect of and sanitation monitoring. BOX 1.4 The monitoring dilemma: matching the story of suppliers with the story of users Effective results-based monitoring in the infrastructure sectors is difficult. The most basic challenge lies in the discrepancy between the data that service providers collect routinely and the data needed to monitor progress in meeting the MDG targets and household needs more generally. Water sup- ply utilities, for example, routinely collect data on the number of active household connections, which is of crucial technical and financial importance to the utility. But these data tell little about the quality of the water supply to those not connected directly to the network. In sanitation, the problem is even more serious: the standard indicator, the number of sewerage connections, tells nothing about the sanitation used by the vast majority in developing countries who are not served by a sewerage utility. Even in the telecommunications sector, monitoring access is a challenge. The International Telecommunications Union annually carries out surveys of telephone regulators and telephone companies and subsequently reports the most reliable figures on the number of phone lines and subscribers. But these numbers overestimate access rates and probably also progress, because dividing the number of subscribers by total population does not differentiate between households with more than one phone and those with none. As recognized by the World Bank and the Joint Monitoring Program since its landmark report in 2000, the key to getting meaningful data on access and service quality in infrastructure services lays in the use of surveys and census data obtained from households, not from service providers. While such a survey-based approach has its own problems--most notably, the impracticality of conduct- ing household surveys every year to monitor relatively minor changes--it is the most straightforward way to cut through the inevitable biases in data obtained from service providers. Unfortunately, there has been little systematic monitoring through household surveys focused on infrastructure services, in particular information and communications technologies and transport services. Moreover, when infrastructure issues have been monitored in household surveys, the focus has been on measuring access to the service, which means quality and affordability have not been monitored. Fortunately, the development community is now committed to overcoming this problem. 38 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N FIGURE 1.6 Access to water, by water source Low-income countries Lower-middle-income countries Bottled water 0.2% Bottled water Piped water 3.4% 20% Tanker Well water truck 34.6% 0.9% Other 1.1% Piped water Surface water 47.9% Well water 15.9% 59.9% Rainwater Rainwater 1.5% Surface 2.0% water 10.2% Tanker truck 1.6% Other 0.7% Source: Staff analysis of Demographic and Health Surveys; see Briceño-Garmendia and Klytchnikova 2006. Notwithstanding the limitations, the tech- to be open to reaching unserved communities nological taxonomy of services can suggest through innovative approaches, which may quality disparities in general and, globally, involve informal or nongovernmental organi- among country income groups. In the case of zation (NGO) providers. Third, they need to water supply, wells are the main source of help subnational entities develop the capacity water for 60 percent of the population in low- to raise resources and borrow responsibly to income countries. The more sustainable and finance infrastructure. efficient option of piped water covers only about 20 percent of the LIC population. In T H E F I N A N C I N G C O N U N D R U M : the case of lower-middle-income countries, P R O T E C T I N G F I S C A L S P A C E F O R the proportions reverse: about 35 percent of I N F R A S T R U C T U R E I N V E S T M E N T the population relies on wells for water, The demand for infrastructure and other ser- whereas 48 percent receive piped water. vices is huge; even as the private sector pres- These data suggest that quality, not just ence has grown, investments have not matched access, rises with country income levels. needs. It has become evident that, with or without private sector participation, the pub- lic sector plays the key role in guaranteeing Expanding Provision of Infrastructure infrastructure provision, not only as a regula- Quantity and Quality tor but also as a financier. But over the last Expanding provision of infrastructure services two decades many countries' public invest- will require three efforts. First, finding the ment in infrastructure as a share of output has financial resources is essential; when public decreased to levels that many now believe are sector financing for infrastructure investment too low. In some sectors--telecommunications is diminished because of fiscal constraints, especially--private investment has replaced efforts to accelerate growth and meet MDGs public investment. Overall, however, the are potentially hampered. Second, govern- increase in private investment has been too ments and the development community need small to offset the decline in public investment. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 39 C H A P T E R 1 FIGURE 1.7 Primary deficit and public infrastructure investment, expenditure decisions, including measures of Latin America, 1980­2000 net worth. Where appropriate, these long- term indicators can even be included in fiscal Percent of GDP Percent of GDP targets or fiscal rules. Estimates of long-term 7 4 effects are highly uncertain, of course, so 6 governments must guard against self-serving 5 forecasts--for example, by setting conserva- 4 3 tive targets and by being transparent in their forecasts (IMF 2005). 3 Such measures need to be accompanied by 2 other measures to select and maintain good 1 2 investments: (1) mechanisms to improve the 0 techniques and use of cost-benefit analysis (for example, for making decisions about road ­1 investments), (2) commercialization (corpora- ­2 1 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 tization or privatization) of public enterprises Primary deficit, left axis Public investment in that get their revenue from direct user fees infrastructure, right axis (such as ports, airports, railways, and water and power distribution), and (3) creation of competition in services wherever possible and Source: Calderón and Servén 2004; and FITCH. allowing competing private firms to make investment decisions (for example, in telecom- In sectors such as roads and water, private munications and perhaps power generation). investment, even if it has increased, remains a small proportion of total investment. R E A C H I N G T H E U N S E R V E D T H R O U G H In many cases the decline of public invest- I N N O V A T I V E A P P R O A C H E S ment has paralleled attempts to reduce unsus- Private utility operators are generally thought tainable budget deficits. Governments have to provide efficient, sustainable services in found it easier to cut investment (and mainte- urban centers. Yet in practice, particularly in nance) than to reduce the public sector wage poor and rural areas, private utilities are bill and other current expenditures (figure 1.7). often absent or inadequate, and households In the long run, attempts to cut deficits by must meet their water, energy, and sanitation cutting public investment may be partly self- needs through self-provision, or through defeating.12 Public investment can create assets reliance on low-cost, small-scale, and local that later generate user fees (power plants, for private providers. Africa has been at the fore- example) or lead indirectly to higher tax rev- front of innovation in water and sanitation enues by increasing output (well-chosen roads, for the last 20 years by replacing central plan- for example). Yet conventional fiscal targets ning approaches with community-based focus only on the effects of expenditure reduc- management of village water supplies and by tion on the cash deficit and public debt, not on implementing technologies like easy-to-main- the long-term effects of well-targeted public tain hand pumps and low-cost pit latrines investments. They can therefore encourage (figure 1.8). governments to invest too little. What about the vulnerable urban poor? To minimize the problem of underinvest- Many nongovernment projects have sought to ment in needed infrastructure, governments promote electrification in slums. Case studies of must consciously offset these biases. One different approaches have been carried out in way to do so is to examine the usual indica- Brazil, India, the Philippines, and South Africa. tors of liquidity and debt together with indi- One successful program is in Salvador, Brazil, cators of the long-term fiscal effects of where a privatized distribution company 40 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N FIGURE 1.8 Access to various forms of sanitation an important gap in local transport services and provide substantial employment for Sub-Saharan Africa members of poor households (Hine 2005). Other 3.8% B R I N G I N G M O N E Y A N D U S E R S Flush toilet C L O S E R T O G E T H E R : D E C E N T R A L I Z A - 8.5% T I O N A S P A R T O F T H E S O L U T I O N ? No access In recent years, the evolving development 34.8% paradigm has placed new emphasis on the role of subnational entities--local govern- ments, utilities, and development financial institutions--in providing or financing infra- Pit toilet structure and other public services. Subna- latrine tional entities may in theory be in a better 52.8% position than national governments to deliver Share of population many services efficiently, because they can better encourage local participation, assess Source: Staff analysis of Demographic and Health Surveys; see local demand, and prove responsive and Briceño-Garmendia and Klytchnikova 2006. accountable. Chapter 6 discusses some con- ditions under which this is likely to be true in practice, including effective downward changed course after realizing that it was accountability and clear allocation of respon- incurring substantial losses and providing sibilities. Other prerequisites for effective poor service to slum areas. It devised a com- decentralization include robust reporting and munity agent program that uses NGOs to audits, as well as debt limits and clear provi- assist in collection, monitoring, and report- sions on emergency financial support from ing. The result has been improvements in central governments. maintenance, responses to outages, and effi- Effective decentralization would require ciency of energy use. Recent surveys reveal subnational entities to meet new responsibil- that 90 percent of customers are highly satis- ities for providing and financing infrastruc- fied with the program. This experience sug- ture services. But many such entities have gests the benefits of working with NGOs and weak financial and management capabilities informal providers to improve electricity ser- and face thin local capital markets. As a vice to slums (USAID 2004). result, these subnational governments are not It is also increasingly common that low- creditworthy and cannot attract private cost, small-scale, and local private providers financing for infrastructure. Weak subna- help fill a gap that the public network monop- tional entities remain dependent on central olies ignore. In Dar es Salaam, Tanzania, a governments, which have different spending cholera outbreak in 1996 forced the sewerage priorities and are unable to provide sufficient and sanitation department to loosen its financing for infrastructure. Under these con- monopoly on cesspit cleaning. Private ditions, service suffers and decentralization providers entered, and now a market for fails to deliver its potential gains. cesspit cleaning is emerging. Households can Over the longer term, the development of choose a provider on the basis of price and subnational entities and domestic financial easy-to-monitor performance (World Bank markets will help alleviate these problems. As 2004). Appropriate transport services--such stronger domestic financial institutions (banks, as the pedal rickshaws of Dakha and other pension funds, and insurance providers) South Asian cities, and the bicycle and motor- develop, they will be able to mobilize local cycle boda-boda services of East Africa--fill resources more efficiently, and they will have a G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 41 C H A P T E R 1 BOX 1.5 Small-scale private service providers Small-scale private service providers (SPSPs) have emerged to fill the large gaps in electricity and water access and are now beginning to gain acceptance as a viable alternative for delivering services to those most in need. Despite concerns about quality monitoring and enforcement, SPSPs are a sig- nificant force in low-income and remote regions. Indeed, they are estimated to reach as much as half the population in postconflict countries and in weak or failed states. In addition, it is estimated that up to a quarter of the urban population in Latin America and nearly half of urban dwellers in Africa rely on SPSPs for at least a portion of their water supply. These SPSPs are largely single-purpose entities that often operate without any formal legal sta- tus. They provide services through widely varying technologies, ranging in sophistication from water tankers and diesel generator dealers to stand-alone networks and power grids. A majority of SPSPs tap financing through a combination of three sources: their own earnings and savings, loans from friends and family, and money borrowed from formal and informal lenders. The total estab- lishment costs for private water network operators ranged from $100 per connection to $300 per connection, depending mainly on local circumstances and markets, whereas the average investment for a second-hand water tanker was $10,000­15,000. Investment requirements for private elec- tricity networks ranged from $1,000 to a few million dollars. Many communities would go unserved if not for SPSPs. Governments and donors should acknowledge this reality by working with these providers to improve their access to financing, which will help SPSPs expand their coverage while improving the quality, efficiency, and affordability of their services. Establishing a clear policy and regulatory framework for SPSPs will also help them expand their coverage. Source: Based on Kariuki and Schwartz 2005. BOX 1.6 Building creditworthy borrowers Although decentralization is assigning greater responsibility for infrastructure and other public ser- vices to subnational entities--local governments, public utilities, and development financial insti- tutions--those entities often lack the ability to attract the necessary local currency financing. At the same time, as national governments devolve responsibility for infrastructure and other services, they prefer to use their borrowing capacity to finance other activities, and they are increasingly limiting their transfers to subnationals. To make decentralization work, national governments are asking the World Bank and other mul- tilateral agencies to provide financing directly to subnationals, in local currency and without sov- ereign guarantees. Most other multilateral agencies are able to do this, but the World Bank's Articles of Agreement require guarantees. The Bank Group's only instrument to lend to subnationals without sovereign guarantees is IFC's Municipal Fund, which lends to subnationals in local currency and at market-based interest rates. Based on early success, the Bank and IFC are working together to scale up the Municipal Fund and to transform their approach to subnational lending. The goal is to build creditworthy subnational entities using technical assistance and financing so they access commercial financing on the strength of their own credit. 42 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 C H A R T I N G A N D S U S T A I N I N G P R O G R E S S I N I N C O M E P O V E R T Y R E D U C T I O N growing demand for local, medium- and long- dramatically in 2005, leading to a significant fall in term debt. They will be able to assess and to the average value of the fiscal balance-to-GDP ratio price credit risk and will seek opportunities to for the region as a whole. Excluding these countries invest in domestic infrastructure assets that results in an average fiscal balance for Sub-Saharan offer attractive risk/reward profiles. Interna- Africa of ­3.4 percent of GDP, which is nevertheless lower than in earlier years. tional competition among borrowers and 4. Staff assessments are obtained from a sur- among lenders will lead to economic, risk- vey by IMF country teams of the quality of policies adjusted access to credit. These changes have in each area. begun, and multilateral agencies are helping to 5. This section is taken from Doing Business accelerate them with financing and technical in 2006. Unless otherwise specified, data refer to assistance. Box 1.6 describes one way in which 2005, the latest year for which comparable data the World Bank Group is contributing. are available. 6. The global commitment to improving Notes access to drinking water supply and sanitation is reflected in MDG 7: to halve the proportion of 1. These projections come with several caveats. people without sustainable access to safe drink- First, they are based on preliminary 2005 estimates ing water and basic sanitation. Progress toward of population and national-accounts GDP growth, this goal is tracked by the WHO/UNICEF Joint as well as estimates of income distribution, all of Monitoring Programme for Water Supply and which may be subject to considerable revision. Sec- Sanitation (JMP). Monitoring access to water ond, while for some countries (most notably India and sanitation on an annual basis is not practical, and China) preliminary household survey data are so the JMP analyzes household survey data from available for 2004, for other countries the latest around the globe every few years to detect over- available household data are from 2002. Third, the all trends; see below for a discussion of monitor- estimates for India--which loom large in the South ing challenges. Asia estimates--are particularly problematic 7. Returns on infrastructure investment tend because of a change in survey methodology in 2004, to fall, sometimes sharply, as economies reach which results in poverty estimates that are not maturity. For details see Briceño-Garmendia, strictly comparable with those of earlier years. All Estache, and Shafik 2004. of these caveats mean that the actual poverty esti- 8. See the section of infrastructure financing mates for 2005, when they become available, may below for further discussion of this issue. differ substantially from these projections. 9. The (still) predominantly rural African 2. Some country groups in table 1.1 include countries and East Asia and Pacific region are log- only a small number of countries. In the low-income ging urban growth rates of 4.1 percent and 3.3 portion of the table, East Asia and Pacific includes percent, respectively, compared with rates of 1.3 Lao PDR, Myanmar, Mongolia, Papua New percent and ­0.6 percent for rural growth. Guinea, the Solomon Islands, and Vietnam; Europe 10. For details on the goal of improving urban and Central Asia includes the Kyrgyz Republic and slums and preventing the emergence of new slum Moldova; Latin America and the Caribbean areas, see United Nations 2005. includes Haiti and Nicaragua; and Middle East and 11. For detail, see WHO/UNICEF 2005. North Africa includes Yemen. In the middle-income 12. Although there are opportunities for cut- countries' portion of the table, South Asia includes ting waste and corruption costs in some public Sri Lanka, and Middle East and North Africa investment projects, the evidence suggests that includes Algeria, the Arab Republic of Egypt, the public investment in infrastructure in developing Islamic Republic of Iran, Jordan, Morocco, Oman, countries increases output and growth. See the Syrian Arab Republic, and Tunisia. Calderón and Servén (2005) for surveys of the 3. In a small number of oil-producing Sub- recent empirical literature. For a discussion of cor- Saharan African countries, fiscal balances improved ruption issues, see chapter 7 of this report. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 43 2 Managing Money for Human Development Results T he wave of new donor commitments in tal immunization programs in Africa have 2005 comes on top of sustained produced substantial declines in measles cases increases in global funding for educa- since 2000. Girls' enrollments are growing tion and health over the previous five years. faster than boys' in every region, and the num- For the lowest-income countries, especially, ber of women elected to parliaments is increas- the stage is set for resource transfers on an ing in many places. The first evidence that HIV unparalleled scale and the chance to make the prevention programs are beginning to work is Millennium Development Goals (MDGs) a emerging. And the number of AIDS patients reality of better lives for hundreds of millions under treatment in the developing world has of people. The challenge now is to turn increased rapidly: from less than 100,000 five resources into results. This chapter highlights years ago to 1 million in 2005. how some countries are doing just that, and Encouraging trends are also observed in identifies the key constraints to faster and policies and program design. Countries in the more equitable MDG progress elsewhere. global partnership Education for All Fast- Broad regional trends of MDG progress Track Initiative (EFA FTI) are beginning to see have not changed significantly since publica- clear benefits from more harmonized donor tion of Global Monitoring Report 2005. All practices. Insecticide-treated bed nets (ITNs) regions are off track on the child mortality goal are being distributed on a larger scale than and on at least some of the other goals. The ever, and national malaria strategies are get- two regions lagging most seriously behind-- ting funding and visibility. Global partners are South Asia and Sub-Saharan Africa--are off closely monitoring child survival where it is track on all of the goals. Children's nutrition is not improving. Immunization programs are worsening in many parts of Africa, a majority making strides in reaching the poor. And in of countries are not making sufficient progress every region, countries are adopting policies on maternal mortality, and HIV/AIDS contin- to make education and, to some extent, health ues to spread across the world. systems more effective and responsive to the But the latest data on outcomes since adop- people they serve. They are increasing com- tion of the MDGs provide some encouraging munity voice in the management of front-line signs of progress. A large set of countries, schools and health facilities. They are allocat- including many in Sub-Saharan Africa, have ing funds more transparently. They are begin- accelerated their progress on primary school ning to link providers' pay to performance. completion in the past few years. Supplemen- And they are conditioning income transfers to G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 45 C H A P T E R 2 families on the families' use of education and and 2015, the proportion of people suffering health facilities. from hunger, as measured by the percentage of The latest data also confirm that external children under five who are underweight. Only funding to support the health and education 34 of 143 countries are believed to be on track MDGs has increased sharply since 2000, and to meet this goal. Almost all of South Asia and donor support appears better targeted to the much of Africa are off track, and in a number lowest-income countries that have country- of African countries nutrition outcomes are owned poverty reduction strategies and worsening, reflecting the nexus between HIV strong commitment to the MDGs. Recent and undernutrition. studies also suggest that at least some devel- Two countries making notable progress are oping countries have successfully managed to The Gambia in Africa and Bangladesh in scale up immunization and schooling cover- South Asia. While starting from--and still age while carefully managing unit costs. at--a very high level of child malnutrition, Signs of progress are clear. But the world is Bangladesh is the only country in South Asia still far from achieving the human develop- that may achieve the nutrition goal. One fac- ment MDGs; donors and countries must keep tor is the country's successful scale-up of com- working on ways to speed progress. This munity-based nutrition programs that work chapter analyzes five core challenges in ensur- with mothers to improve feeding practices and ing that increased financing translates into promote infant and child growth. Tested in faster and more equitable MDG progress. For the early 1990s by the local nongovernmental donors, there is one overriding challenge: organization (NGO), the Bangladesh Rural increasing the efficiency of aid. For develop- Advancement Committee (BRAC), the pro- ing countries, the key challenges are grams have received strong government back- ing and coordinated donor support since 1995 maintaining efficiency as expenditures and are now mainstreamed into Bangladesh's scale up rapidly; national health, nutrition, and population sec- reducing leakage to ensure that resources tor program. In the next phase nutrition pro- are used for intended purposes; grams will operate with a strong focus on doing more to reach the poor; and results: disbursements are linked to perfor- investing smartly to achieve larger impacts mance, and good performance is rewarded on human development outcomes through with bonus funds from donors, many of which complementary investments in water, san- operate in Bangladesh through a sectorwide itation, roads, and housing. approach (SWAP) funding pool. Nutrition is also one of the six pillars of the Bangladesh Countries Making MDG Progress Poverty Reduction Strategy Paper (PRSP) Comprehensive data on country and regional (Pelletier, Shekar, Du, and Kostermans 2005). progress toward each of the MDGs can be The strong performance of The Gambia found in World Development Indicators over the last five years can be attributed to 2006. This chapter identifies some of the high-level political support (the National countries making exceptionally fast progress Nutrition Council and National Nutrition toward the MDGs, and the success factors Agency are chaired by the country's vice pres- involved, as well as countries where MDG ident); to development of institutional capac- outcomes are worsening. ity at the national, divisional, and local levels for monitoring and addressing malnutrition; and to effective and well-targeted interven- MDG 1: Nutrition tions. Programs focus on the window of Malnutrition is an indicator and perpetuator opportunity between pregnancy and the first of income poverty. The nonincome poverty two years of life, when nutritional interven- target under MDG 1 is to halve, between 1990 tions have maximum impact on infants' brain 46 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S development. The program educates moth- mand of a globally relevant level of skills and ers, provides micronutrient supplements, and knowledge. Countries and donors need to promotes infant and child growth through give more attention to measuring learning improved feeding practices. outcomes, testing teachers for content mas- tery before they are hired, and making sure teachers have the materials and professional MDG 2: Universal Primary School development support they need to be effective Completion in the classroom. The FTI must stay focused Estimates of the primary completion rate in on promoting completion with quality. developing countries show steady progress in most regions. Although about one-third of all MDG 3: Gender Equality developing countries are considered off track, and another 18 percent have inadequate data, The first MDG to fall due was a measure of the number of countries that have achieved progress toward the goal of gender equality universal primary completion increased from and empowering women--the elimination of 37 in 2000 to 50 in 2004, and recent data disparities in primary and secondary educa- suggest that the average pace of progress is tion by 2005. Although it was not met, girls' increasing slightly. In 1990­7, the mean rate enrollments are growing faster than boys' in of improvement in primary completion was all regions, and the prospects for reaching the about 1.5 percent per year; since 1998, it has primary level target by 2015 are good. In been 2.1 percent per year. Analysis by the sec- South Asia and Sub-Saharan Africa, however, retariat of the EFA FTI, the global partner- the primary completion rate for girls is still ship to promote primary education progress, more than 15 percent lower than that for shows that the 17 countries that have joined boys (World Bank 2004a). In 2015, it is pro- the FTI are registering even faster improve- jected that 21 of 133 countries--12 of them ment--about 3 percent per year. In two FTI in Sub-Saharan Africa--will still have girls' to countries, Niger and Guinea, for example, boys' primary enrollment ratios below 0.9 primary completion rates have been increas- (Grown, Gupta, and Kes 2005). ing three times faster than before 2002­3. Achieving the target of gender equality at Countries making the fastest progress--such other educational levels will be more difficult. as FTI countries Ethiopia and Mozambique The challenge of getting and keeping girls in and others such as Cambodia, Benin, and secondary school is particularly severe. In Rwanda--are exceeding the rates of improve- South Asia, only 47 percent of girls go to sec- ment achieved by today's industrialized coun- ondary school, and in Sub-Saharan Africa, tries at a similar point in their history. only 30 percent (Grown, Gupta, and Kes Not all of this progress can be attributed to 2005). In developing regions as a whole, 80 the FTI. But countries become eligible to join girls for every 100 boys are enrolled in ter- FTI by having a "credible" education sector tiary education (United Nations Statistics plan agreed with donors, and donor commit- Division). The widest gaps are in Sub-Saha- ment to harmonization and the mobilization ran Africa, where only 68 girls for every 100 of additional grant funding to reward policy boys are enrolled in university or other ter- and outcome progress are at the core of the tiary-level education, followed by Southern FTI's mutual accountability framework (box Asia, with 71 girls for every 100 boys. As for 2.1). Niger provides an example of the inter- literacy, there was some progress in the 1990s action between policy progress and increased in reducing the gender gap, but at the current and more flexible donor support (box 2.2). rate, southern Asia, western Asia, and north- While the quantitative progress is encour- ern and Sub-Saharan Africa will not achieve aging, universal primary completion is only a the MDG target of parity by 2015 (United meaningful goal if it signals childrens' com- Nations Statistics Division). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 47 C H A P T E R 2 BOX 2.1 Education for All Fast-Track Initiative Three years after its launch, the EFA FTI appears to have reached cruising altitude. It has an agreed operating framework, an established system of rotating donor leadership, a functioning secretariat, and donor collaboration mechanisms credited with producing tangible gains in harmonization at both the country and global level. Since early 2005, seven countries whose donor partners endorsed their education sector plans have joined the initiative (Djibouti, Kenya, Lesotho, Madagascar, Moldova, Tajikistan, and Timor-Leste), bringing the total to 20. In its third year of operation, the $445 million EFA FTI Catalytic Fund (in 2003­7) has disbursed $75 million to nine countries that meet the criterion of having too few donors to close the financ- ing gap in their agreed education plans. Five new donors made contributions to the Catalytic Fund, joining four earlier donors on its governing board. Total aid for education in the FTI countries over the past three years is estimated at $350 million a year, most of it--under the initial concept of a virtual fund--flowing through existing donor channels. A new support facility--the Education Program Development Fund--was launched in 2005, with $30 million in contributions from five donor countries for 2005­7. The fund finances upstream and downstream technical support for countries with weak capacity to develop or implement sound sector plans--a core requirement for joining the initiative. Key beneficiaries are expected to be frag- ile states, and 25 countries are already benefiting from its support. At the December 2005 EFA FTI meeting in Beijing, it was agreed that the initiative will expand to as many as 40 additional countries over the next two years and that the Catalytic Fund may need to shift to longer-term financing (beyond the current three-year limit). In addition, the steering com- mittee was expanded and specific actions on harmonization were requested of all members. Although the initiative will face challenges during 2006, with a change in the secretariat and a continuing need for additional financing, it has clearly emerged as a key vehicle for financing, tech- nical support, and donor harmonization in education. Source: EFA FTI Secretariat. Progress in increasing women's share of pay low wages (World Bank 2001). Given the nonagricultural wage employment and hold- current trend in gender equality in political ing parliamentary seats is notable. Women's participation, it may be difficult to reach the share of the labor force has risen in almost all MDG 3 target of having 30 percent or more of regions (United Nations Statistics Division), national legislative seats held by women by but women are still at a disadvantage in labor 2015. By January 2005, only 17 countries had markets. Their participation is often restricted met this target, and globally, the proportion by onerous time burdens that result from a was only 15.9 percent, up from 13.5 percent in very unequal division of tasks in the household 2000 (United Nations Statistics Division). and limited infrastructure for child care and Notwithstanding the overall slow progress, other household duties (Blackden and Wooden there are many examples of innovative pro- 2006). The earnings gap between men and grams that are helping countries progress women is shrinking, but in developing coun- toward gender parity, particularly in educa- tries women still earn on average about 30 tion, but also in access to economic resources percent less than men (World Bank 2001). and political participation. Unemployment rates are consistently higher Education. In Bangladesh the emphasis for women workers (ILO). Occupational seg- that government and other actors have placed regation is pervasive; women frequently are on girls' education since the 1990s has confined to traditional female occupations that changed the public discourse and the pattern 48 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S BOX 2.2 Jump-starting progress on primary completion in Niger Five years ago in Niger, only one of every five children completed primary school, one of the low- est completion rates in the world. The government struggled to expand schooling, devoting 80 per- cent of its education budget to primary schooling, but it received little external support and could not afford to hire more than 250 new teachers per year. But by 2005, Niger was one of the world's best performers in terms of progress in bringing children through its primary education system. What changed? A key factor was a politically difficult reform of teacher salary policy: the government froze the recruitment of civil service teachers and promoted system expansion by hiring new "contract teach- ers" on shorter-term, renewable contracts at a lower salary level, on a par with the average teacher salary across low-income countries. Since then, teacher hiring has jumped from 250 to 2,500­3,000 per year. The 16,000 new contract teachers have more than doubled the teaching stock and made the unit costs of primary education more fiscally sustainable. School enrollments have doubled-- from 530,000 to 1.1 million children--representing a 16.6 percent yearly increase. Children in rural areas have been the biggest beneficiaries; in these areas enrollments increased from 38 percent to 51 percent between 2002 and 2005, closing the gap with the national average. The government's courageous reform has increased the primary completion rate from 20 per- cent in 2000 to 36 percent in 2005 and reduced geographic disparities. Official development assis- tance (ODA) to Niger has tripled, from about $10 million to $39 million per year, since it joined the EFA FTI in 2002, and donors have made concrete progress in merging missions and using com- mon performance indicators. The government's education sector plan, agreed with donors under the FTI process, is tackling key issues, such as lagging girls' completion rates, by introducing tar- geted stipends and trying to improve school functioning with local school management committees and a new information tool: performance "monitoring sheets" that compare schools' resources and results are posted in each school. Source: EFA FTI Secretariat. of education. This emphasis, combined with Access to economic resources. In Argentina, large-scale stipend programs to reward girls the female share of nonagricultural wage for going to school and sustained expansion employment rose from 36 percent in 1990 to of schooling supply, which included attention 48 percent in 2003. Much of the change can to latrines, wells, and female teachers, has be attributed to vocational and technical closed the gender gap in both primary and sec- training programs targeted to women, such ondary education. By 2002 girls' enrollment as FORMUJER, and to the 2003 Heads of in primary school was 100 percent, and girls' Households program, which paid female attendance and performance on achievement heads of households with children under 18 tests surpassed those of boys. years old for community work. Mauritania has also made impressive In Mali, the introduction of small-scale, progress--increasing the primary enrollment multifunctional diesel engines that can pro- ratio for girls from 39 percent in 1990 to 85 vide electricity, pump water, and mechanize percent in 2001--by expanding the supply of grain milling and other tasks has improved schooling, recruiting female teachers, and women's economic situation, reduced their offering girls scholarships and school meals. work burden, and promoted development But at both the primary and secondary levels, and poverty reduction in communities. boys still perform better in end-of-cycle exams, Between 1999 and 2004, 400 diesel engines and the repetition rate for girls is higher. were installed, reaching 80,000 women in 10 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 49 C H A P T E R 2 districts. In the first five years of the project, assembly seats for women. But 15 additional the engines saved women 1 to 3.3 hours of women were elected to nonreserved seats, labor per day; the girls-to-boys ratio in grade bringing the total to 39 women in the Lower 5 improved; the proportion of girls entering House (of 80 members). In the Senate a con- secondary school rose from 31 percent to 38 stitutional quota of 30 percent has also been percent; and visits to local clinics for injuries exceeded. caused by burdensome work were reduced. Women's associations own, manage, and MDG 4: Child Mortality maintain the engines and sell energy services. Women have increased their income from an More than 10.5 million children under the average of $68 to $122 per year, and the age of five die each year from preventable and number of women earning at least 150,000 treatable causes--4 million during the first CFAF (West African Francs) increased by a month of life and 3 million during the first factor of 10 (Modi and others 2005). week. Simple, known, and low-cost treat- Political participation. A few years ago ments for childhood respiratory and diarrheal Morocco had the lowest rate of female repre- diseases could keep an estimated two-thirds of sentation in the Arab world: 0.6 percent. these children alive. The MDG for child mor- Today 35 female parliamentarians make up tality calls on countries to put these interven- 11 percent of the parliament. Five years of tions to work to achieve a two-thirds decline research and advocacy by civil society from the 1990 baseline by 2015, a reduction resulted in an implicit 20 percent quota sys- of 4.3 percent a year. tem, applied voluntarily by political parties at A recent study shows that this target rate the last parliamentary elections. of improvement is very ambitious compared Another impressive case is Rwanda, cur- with the average long-term country experi- rently at the top of the world ranking for ence in improving child survival, and indeed, women's political leadership; there, women most low- and middle-income countries comprise 49 percent of the National Assem- today are not making enough progress to bly. Rwanda's new constitution reserves 24 reach the goal (Eifert and Gelb 2005). Some BOX 2.3 China's slow progress on child mortality China, which had one of the world's most spectacular records of sustained child mortality improve- ment before 1990, is now considered at risk of not reaching the child mortality MDG. Between 1960 and 1980, China reduced child mortality from 225 to 64 per 1,000 births, a rate of ­6.3 per- cent per year and well above the MDG target rate. Since 1990, however, progress on under-five mor- tality has slowed substantially--despite a huge increase in economic growth and strong improvements in nutrition, including among children--factors that should greatly improve child survival. Although the most recent estimate of China's child mortality progress (­3.3 percent per year) is better than progress in many other countries, it is far below the progress of top performers, including most other East Asian countries. National data also point to widening gaps in under-five survival between richer and poorer provinces, and between boys and girls. China is one of just seven countries in the world where a girl's risk of dying by age five is higher than a boy's, and it has the largest gender gap by far. New research suggests that infant and under-five mortality rates among girls in China may actually be rising. While improvements in male infant mortality continue to drive China's overall child survival progress, female infant mortality is increasing by nearly half a percent per year. Source: World Bank East Asia Region 2005. 50 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S 117 (79 percent) of the 148 developing coun- The overall picture is highly troubling. tries for which data are available are esti- But there are some encouraging factors. mated to be off track on MDG 4. While the First, some countries are sharply increasing majority of these countries are making some child survival (table 2.1), and there are progress, seven countries have seen no lessons to be learned from their experience. improvement since 1990 (box 2.3), and in 15 Second, post-2000 data provide some evi- countries the share of children who die before dence of accelerating rates of progress. age five has increased. The last group includes Third, led by the Global Alliance on Vaccines conflict-affected countries, such as Cambo- and Immunizations (GAVI) (box 2.4), immu- dia, Central African Republic, Côte d'Ivoire, nization coverage has expanded sharply in Iraq, and Rwanda, and countries hit hard many countries over the past few years, pro- by HIV/AIDS, such as Botswana, Kenya, ducing, for example, a 91 percent drop in Lesotho, South Africa, and Swaziland. measles cases in 19 Sub-Saharan African TABLE 2.1 Sharp increases in child survival for some countries Under-five mortality rate per 1,000 births Annual percent change 1990 1995 2000 2004 1990­2004 Low-income Vietnam 53 44 30 23 ­5.9 Timor-Leste 172 145 102 80 ­5.4 Bhutan 166 133 100 80 ­5.2 Mongolia 108 87 65 52 ­5.2 Lao PDR 163 131 101 83 ­4.8 Sub-Saharan Africa Eritrea 147 122 97 82 ­4.2 Comoros 120 100 82 70 ­3.8 Cape Verde 60 50 42 36 ­3.6 Mozambique 235 212 178 152 ­3.1 Guinea 240 208 175 155 ­3.1 Middle-income Czech Republic 13 10 5 4 ­7.7 Egypt, Arab Rep. of 104 71 49 36 ­7.5 Peru 80 60 42 29 ­7.2 Macedonia, FYR 38 26 18 14 ­7.1 Syrian Arab Republic 44 31 22 16 ­7.0 Source: World Bank 2006. BOX 2.4 Global Alliance for Vaccines and Immunization The Global Alliance for Vaccines and Immunization (GAVI) links private and public sector partners to save children's lives and protect health through the widespread use of vaccines. By the end of 2005 it had made financial commitments totaling $1.4 billion over five years to 72 of the 75 eligible low- income countries. Immunization coverage in these countries has increased from 57 percent in the 1990s to an estimated 65 percent in 2003. GAVI's strong record has helped attract new funds. It is working with partners to develop the new International Financing Facility for Immunization; com- mitments in 2005 will yield an additional $3 billion in disbursements to governments before 2015. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 51 C H A P T E R 2 countries since 2000 and pointing to possible Africa there has been almost no improve- further impacts on child survival rates in the ment, and in South Asia the coverage levels coming years (Otten and others 2005). remain low, despite significant improvement. While the largest declines in child mortality Within South Asia the improvement is heav- since 1990 have occurred in the middle-income ily driven by Bangladesh, which has achieved countries, the experience of many countries a very large and sustained increase in demonstrates that appropriate combinations of women's access to skilled attendants at birth. policies and technologies can produce big gains Trends in coverage rates, for key maternal in child survival, whether the starting level of and child interventions, are important for child deaths is very high, as in Guinea, or very tracking, whether effective interventions are low, as in the Czech Republic. being implemented. The "Countdown to 2015" working group established by the new global Partnership for Maternal, Newborn, MDG 5: Maternal Health and Child Health (PMNCH) is tracking cov- Cross-country data on maternal mortality erage rates for key nutrition, vaccination, and rates are not readily available, so the best other child health interventions in 60 priority indicator is the share of women with access to countries where the under-five mortality rate trained birth attendants at delivery. The latest exceeds 90. These data, measured more fre- data, presented in table 2.2, show strong quently and reliably than the MDG out- progress in East Asia and the Pacific since comes, provide a better indication of whether 1990 and good coverage in Latin America interventions are sufficient and effective. The and the Caribbean. But in Sub-Saharan Countdown working group is also following TABLE 2.2 Skilled attendants at delivery, by region, 1990 to 2003 Percent of births covered Percentage change Region by the data 1990 2003 1990­2003 Sub-Saharan Africa 61 40 41 3 South Asia 97 27 38 42 East Asia and Pacific 80 45 76 68 Latin America and the Caribbean 70 74 86 16 Total developing countries 75 41 57 38 Sources: Data from Demographic and Health Surveys (DHS), Multiple Indicator Cluster Surveys (MICS), and comparable surveys, weighted by num- ber of births. BOX 2.5 A new global partnership for the health of mothers, newborns, and children The new global Partnership for Maternal, Newborn, and Child Health brings together three exist- ing partnerships to strengthen and accelerate the response to MDGs 4 and 5 and to provide a uni- fying framework for action. With more than 80 organizations and partners, it increases resources, supports national planning processes, and promotes donor convergence at the country level. It also provides leadership in interactions with other relevant players, including the Global Alliance for Vaccines and Immunization; the Global Fund to Fight AIDS, Tuberculosis, and Malaria; and the Roll Back Malaria Partnership. 52 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S countries' adoption of key policies that pro- turning a corner: HIV prevalence among vide the basis for effective child health pro- pregnant women there fell from 6.2 percent grams (box 2.5). in 1993 to 3.1 percent in 2003­4; the most pronounced decline was in urban areas. Increased AIDS mortality may explain MDG 6: AIDS, Tuberculosis, and Malaria much of these downward trends. But evidence Both the number of people living with HIV that decreased HIV prevalence also reflects (40.3 million) and deaths from AIDS contin- real successes of HIV prevention programs ued to increase in 2005. Sub-Saharan Africa comes from recent comparisons of prevention remained the most affected region, with 63 activities across regions in Tanzania and percent of all people living with HIV. While across the Uganda-Kenyan border (box 2.6). no region has yet achieved a declining rate of Central to successful programs are inter- new infections, recent data suggest that a few ventions of sufficient intensity, as highlighted countries have begun to do so. These coun- by Zimbabwe. Despite an unfavorable macro- tries provide the first indication that deter- economic and political context, the country mined government action can halt the spread has apparently maintained one of the highest of AIDS. New evidence suggests that preven- levels of condom use in Africa (86 percent tion programs initiated some time ago are among men, and 82 percent among women finally bearing fruit in Zimbabwe, the first for 2000­5). Sales data suggest that high con- documented decline in southern Africa: HIV dom use started in the mid-1990s. With other prevalence appears to have fallen from 26 key behavioral changes, including sharp percent in 2002 to 21 percent in 2004. Haiti's reductions in the number of sexual partners, epidemic, one of the oldest, could also be condom use appears to have lowered the BOX 2.6 HIV prevention works when it is intensive and sustained That HIV prevention can work is illustrated by comparing the Mbeya region in southwest Tanzania to the Rukwa region in the west. Prevalence rates among pregnant women aged 15­24 increased in both regions from 1988 to 1994­5. They then started to decline in Mbeya--from 20.5 percent in 1994 to 14.6 percent in 2000--but continued to increase in Rukwa. A key factor appears to have been com- prehensive prevention programs launched in Mbeya beginning in 1988 with German technical sup- port. These programs led to a steady increase in the use of condoms, treatment of sexually transmitted infections, and observed behavioral changes. Rukwa, with limited resources and no external support, made little effort at prevention--and there has been no documented decline in HIV prevalence there. Surveillance site data from western Kenya and eastern Uganda also suggests that policies matter. In the early 1990s, HIV prevalence was similar along the border: all 11 sentinel sites in the zone had rates above 10 percent. Since then, however, trends have diverged. By 2000 prevalence rates at the Kenyan sites exceeded 10 percent and varied from 10 percent to 35 percent, but in eastern Uganda, all six sites were below 10 percent, and five of the six were in the range of 3­6 percent. Many analysts believe high- level political commitment in Uganda has made the difference: Uganda's National AIDS Commission was established in 1986 within the Office of the President; Kenya took the same step only in 1999. Uganda has also made extensive use of NGOs as well as government health services for compre- hensive prevention programs, including voluntary counseling and testing (VCT). While there is some recent evidence that the broad-based approach to HIV prevention and care launched in Kenya after 1999 is also beginning to produce results, its later start appears to show in the different trends between the otherwise similar border populations of western Kenya and eastern Uganda through 2000. Sources: Jordan-Harder and others 2004; Moore and Hogg 2004. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 53 C H A P T E R 2 BOX 2.7 Global Fund to Fight AIDS, Tuberculosis, and Malaria In 2005 Round 5 of the Global Fund to Fight AIDS, Tuberculosis, and Malaria approved new financing for 20 countries totaling $382 million, the lowest amount so far and substantially below the 2004 Round 4 approvals of more than $1 billion for 52 countries. Round 5 proposals included HIV/AIDS ($128 million); tuberculosis ($146 million); malaria ($67 million); and, for the first time, health-system­strengthening activities in two countries ($41 million). Total approved financing for the Global Fund since Round 1 in 2002 has been $4.9 billion; $1.9 billion was disbursed by December 2005. Global Fund financing has provided funding for the dis- tribution of 7.7 million insecticide-treated bed nets to combat malaria, for the treatment of 1 mil- lion tuberculosis cases under DOTS (recommended tuberculosis treatment regime), and funding for nearly 400,000 people with HIV for antiretroviral treatment (by December 2005). overall prevalence rate (UNAIDS 2005). This and polio immunization and deworming. Pre- finding echoes an earlier analysis that exam- liminary results indicate that the campaign ined condom effectiveness in a general popu- increased possession of ITNs from 6 percent lation with HIV prevalence in rural Rakai, to 62 percent, averaged across all households. Uganda: regular condom use significantly An estimated 98 percent of households with a reduces the incidence of HIV (Ahmed 2001). child under five years of age now have at least The number of people on antiretroviral one ITN, and 95 percent of households treatment more than doubled from 400,000 in received it from the distribution campaign. late 2003 to about 1 million by end-2005. Cov- The combined vaccination/bed net distribu- erage now exceeds 80 percent in Argentina, tion appears to be a promising strategy for Brazil, Chile, and Cuba. As a result of the scale- increasing cost-effectiveness. up in treatment, between 250,000 and 300,000 deaths were averted in 2005, but the full effects MDG 7: Environmental Sustainability will only be seen in later years. (Water and Sanitation Targets) The World Health Organization estimates 350 million to 500 million clinical episodes of Although infrastructure in many regions has malaria per year. Evidence is accumulating expanded rapidly in absolute terms, popula- that ITNs can reduce malaria deaths. The tion growth has increased even faster. Only United Nations Children's Fund's Accelerated two regions--East Asia and Latin America Child Survival and Development Initiative, and the Caribbean--are on track to meet the started in 11 countries in West and Central MDG targets for water and sanitation, which Africa in 2002, and household surveys in are crucial for progress on the health MDGs, 2003 confirmed significant increases in the use as well as being important in their own right. of ITNs. Although it is too early to see impacts Europe and Central Asia has gone backward-- on the under-five mortality rate, the program from nearly universal coverage in 1990 to has focused on the hardest-to-reach districts eroded service and unsafe water quality as a and has proved that progress is possible result of protracted maintenance failures. Sub- against the odds. A similar program in Ghana Saharan Africa has had the slowest progress: sharply increased the use of ITNs from less only an estimated 64 percent of the population than 5 percent to more than 75 percent. has access to safe water and 37 percent to Togo launched a potentially important new improved sanitation. model of intervention in December 2004. The The poorest quintiles in every region have country conducted a major national campaign the least access to water and sanitation, but the of ITN distribution combined with measles biggest divide is geography. Even in the lowest- 54 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S income countries, 83 percent of urban dwellers ity poses for many low-income countries have access to water, compared with only 55 attempting to accelerate MDG progress. It percent of rural dwellers. In lower-middle- concluded that leveraging scarce skills income and upper-middle-income countries, (through contract teachers or community more than 93 percent of the urban population health workers, for example) was helping has water access and more than 84 percent to some countries overcome the provider con- sanitation, whereas coverage in rural areas is straint and allowing them to scale up service at least 20 percentage points lower. delivery. However, managing migration-- Taking advantage of economies of scale and especially of health manpower--dealing with scope in water, sanitation, and housing provi- the impact of HIV/AIDS on provider num- sion in urban areas is key, as is using small- bers, and expanding training systems all scale local providers in rural areas. As noted in remain difficult challenges. chapter 1, Africa has been at the forefront in This report focuses on financing. The latest developing new ways to provide sustainable available data begin to offer an empirical basis services to very poor and isolated populations. for analyzing key questions on the financing It has established community-managed village constraints to MDG progress. How much water supplies and private cleaning services for funding is being mobilized? How efficiently is latrines. Since the government loosened its it being used? And what are the biggest chal- monopoly on cesspit cleaning, households in lenges to improving results for investment? Dar es Salaam, Tanzania, have been able to choose among providers on the basis of price External Financing and performance. The latest data show that ODA commitments Turning Resources for education and health have increased sub- into MDG Results stantially since the MDGs were adopted in 2000 (figure 2.1); 2004 saw the sharpest rise Global Monitoring Report 2005 focused on yet. Total assistance for health in 2004 is esti- the constraint that human resource availabil- mated at $11.4 billion and that for education, FIGURE 2.1 Development assistance for education and health ODA commitments for education ODA commitments for health 2003 US$ billions 2003 US$ billions 10 12 9 10 8 7 37% 8 53% 6 5 11% 6 53% 4 31% 30% 4 3 16% 10% 39% 46% 32% 2 27% 31% 2 14% 19% 1 26% 30% 13% 27% 28% 15% 0 0 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 Education, other Basic education Basic health HIV/AIDS Other health Secondary education Post-secondary education Source: OECD DAC for education and health commitments; HIV/AIDS estimated commitments from Lewis (2005a). Note: Values for HIV/AIDS for the years 2001 and 2003 are interpolated. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 55 C H A P T E R 2 $9.5 billion. Within education, support for subset of low-income countries for which primary education has had the largest comparable data from 2000 and 2003 are increase, and commitments to low-income available, spending on education as a share countries have risen much more than aid to of GDP has increased somewhat since 2000, middle-income countries. In 2000­4, commit- in some cases significantly. Public spending ments for primary education in low-income on health has not, however (figure 2.2). But countries rose 175 percent in constant dollars, public spending on health, especially in low- compared with 87 percent in education ODA income countries, is generally less than half overall. Fifty percent of education support in of total national health spending, most of low-income countries is now for primary edu- which is private, out-of-pocket spending on cation, compared with about 33 percent in the private health services and pharmaceuticals. late 1990s. The realignment toward the MDG For the small sample of middle-income coun- agenda has been clear. tries covered by these data, spending on both ODA for health is increasing greatly as well. sectors increased as a share of GDP, espe- Since 2000 new commitments have grown 83 cially for education. percent in constant dollars. The share for pri- As a share of the central government bud- mary care has declined, however, from about get, education and health expenditures 28 percent of total health assistance in 1999 to increased slightly between 2000 and 2003 in 15 percent in 2004. The fastest-growing seg- every region except the Middle East and ment of health assistance is for HIV/AIDS North Africa, and for education, in Sub- programs, up from about 14 percent of devel- Saharan Africa (figure 2.3). Countries regis- opment assistance for health in 2000 to more tering particularly high increases in the than 30 percent in 2004. There are also impor- budget shares for education and health tant institutional changes: new private financ- include Angola, Bhutan, Botswana, Burkina ing sources, notably the Gates Foundation, Faso, Chile, Guyana, Kenya, Kyrgyz Repub- have become major players. Gates Foundation lic, Madagascar, Malawi, Moldova, Peru, support for health has averaged about $500 Senegal, Sierra Leone, Vietnam, and Zambia. million a year over the past five years. And the Nevertheless, all but a handful of countries launch of some 70 global health partnerships fall short of the Fast-Track Initiative target of over the past 10 years has also changed the 20 percent of the budget for education: shares landscape: in 2004 they delivered more than average around 15 percent. For spending on 20 percent of total health assistance (Gottret health, only three countries in the entire sam- and Schieber 2006). ple--Chile, São Tomé and Principe, and Turkmenistan--even approach the target of 15 percent of the budget set by African min- Developing-Country Spending isters in 2002. While the general trend is up, Fiscal data remain incomplete for 2003. Most a few countries have seen large drops in major countries are missing from Interna- spending shares for education and health: tional Monetary Fund (IMF) data, the only Cameroon, The Gambia, and (to a lesser source of standardized cross-country data on extent) Mozambique. (central) government education and health The incompleteness of the data makes all spending, both in relation to GDP and as a observations tentative. It also poses a real share of the overall budget. Data available for issue for efforts to link resources to results in 2003 cover only 21 of 79 middle-income monitoring MDG progress, at least in the countries and 27 of 57 low-income countries. human development sectors. The current For this small sample, however, the data do data platform is wholly inadequate. show some significant upward trends.1 Both the IMF and the World Bank expend While average spending on education significant resources collecting and analyzing across the sample has not increased, in the government revenue and expenditure data. 56 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S FIGURE 2.2 Developing-country spending on education and health Government spending on education Government spending on health Percent of GDP Percent of GDP 8 4 3.4 5.9 3.0 6 3 4.9 2.6 4.1 4.3 2.2 3.7 4.0 4.1 3.9 2.0 1.9 2.0 4 2 1.6 2 1 0 0 1990 1995 2000 2003 1990 1995 2000 2003 Low-income countries Middle-income countries Source: IMF. Note: Unweighted averages based on corresponding available data for 2000 and 2003. FIGURE 2.3 Share of total government spending for education and health, by region Education Health Percent of government spending Percent of government spending 25 15 20 10 15 10 5 5 0 0 Sub- East South Middle Latin Europe Sub- East South Middle Latin Europe Saharan Asia & Asia East & America & Saharan Asia & Asia East & America & Africa Pacific North & Central Africa Pacific North & Central Africa Caribbean Asia Africa Caribbean Asia 1990 2000 2003 Source: IMF. Note: Unweighted averages based on corresponding available data for 2000 and 2003. The IMF focuses mainly on fiscal aggregates; duced by the IMF, and it has significant coun- the Bank analyzes subsectoral and sub- try gaps and no data on subsectoral or sub- national spending patterns and spending national social spending. It is impossible to effectiveness in the context of its public say today, for example, whether increased expenditure reviews and sector studies. Yet ODA for primary education in Sub-Saharan no systematic, cross-country database unites Africa has been reflected in any increase in these data. The only available series is pro- government spending on primary education G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 57 C H A P T E R 2 across that region. Meaningful efforts to and 1990s in three sectors: primary education, determine whether increased resources are childhood immunization, and road mainte- producing results depend on such data. nance (Roberts 2005). While unit costs for The Development Assistance Committee education rose in six of the eight countries (DAC) of the Organisation for Economic Co- studied, those for road maintenance were con- operation and Development (OECD) has stant or declining, and those for childhood made good progress over the past two years immunization were stable in one country in upgrading the quality and timeliness of (Bangladesh), despite a massive expansion of cross-country data on ODA, in part in recog- program coverage; in another case, Nepal, nition that these data are crucial for monitor- data were inconclusive. ing progress in implementing the Monterrey The study found that Bangladesh had accords and donor commitments related to expanded immunization coverage from virtu- the MDGs. A parallel effort by the Bretton ally zero in the 1980s to 70 percent in the Woods institutions to ensure common stan- 1990s with no increase in unit costs. Although dards and classifications in collecting govern- unit costs did fluctuate annually, with lumpy ment expenditure data and to unify these in a expenditures on equipment and vehicles, the single, standardized cross-country database program gradually penetrated hard-to-reach for use by both institutions--as well as oth- areas over a 12-year period, and the unit cost ers--is sorely needed in a world where not remained virtually the same as the average just results, but the efficient use of resources cost. The explanation appears to be the com- to produce results, is a core policy interest. bination of falling real prices for the vaccines delivered2 as the number of global suppliers increased; reductions in wastage; and improve- Spending Money Effectively-- ments in staff productivity, which exceeded Five Key Challenges increases in salaries over the period. For education, unit costs tended to Maintaining Efficiency as Spending increase as overall spending rose. Not sur- Scales Up prisingly, given that teachers' salaries repre- Evidence from OECD countries shows that sent about 80 percent of education system major increases in public expenditures in sec- costs, the prime driver was rising real salaries. tors such as education often translate mainly Interestingly, however, the increases did not into higher unit costs rather than increases in appear to reflect any short-run rigidities in the output. In the United States, for example, supply of new teachers, but rather the politi- researchers have documented that a tripling cal necessity of reversing extended periods of of real education spending per student since real wage decline. In all six countries where 1960 has all been absorbed by higher teacher unit costs increased throughout the period salaries and lower class sizes and has had no (Bolivia, Ghana, Mozambique, Uganda, measurable impact on either student numbers Yemen, and Vietnam), severe previous wage or average student learning levels (Hanushek compression leading to concerns about the 2003). Given the large increase in spending quality and motivation of teachers was the needed to scale up education, health, and main rationale: wage increases were consid- water and sanitation coverage in many devel- ered essential to protect long-term education oping countries and documented institutional quality and sustained enrollment growth. weaknesses, it is important to track how well Concomitant increases in the per-student increased spending is managed, including its costs of school construction, learning materi- impact on input prices and unit costs. als, and teacher training were observed, but A recent study called for more attention to these increases were much smaller. this issue in the MDG context and analyzed In some phases of the expansion in all of developing-country experience over the 1980s the countries, unit costs declined as a result of 58 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S "one-off" efficiency measures such as the FIGURE 2.4 Education unit costs in best-performing developing introduction of double-shift schools or the countries, 1999­2002 reallocation of excess administrative staff at headquarters to classrooms. Rising pupil- 15 Ethiopia teacher ratios in several cases also kept costs Cambodia 10 stable for some period, as in Uganda after Mozambique 1996--but with a marked deterioration in 5 The Gambia quality, as reflected in declines in student test change) student Morocco Benin performance. Only in two of the six coun- per 0 ­10 ­5 0 5 10 15 20 25 tries--Ethiopia and Mauritania--was the erageva Mali Niger education system able to maintain rapid ual ­5 Madagascar expansion with declining marginal costs over Spending (ann Côte d'Ivoire ­10 a fairly extended period, and in both cases the expansion appeared to be linked to initially ­15 high average teachers' salaries relative to the Total education spending market for skilled workers. Even in these (annual average change) cases, however, erosion of perceived quality eventually became a political concern and led Source: Bruns, Mariscal, and Gacougnolle (forthcoming). to wage policy reversals. A new effort to extend this analysis takes a slightly different approach (Bruns, Mariscal, but enrollments have continued to rise faster. and Gacougnolle forthcoming). Instead of Interestingly, the country with the largest focusing on the countries with the fastest spend- increase in unit costs between 1999 and 2002 ing growth, it examines the countries with the is Ethiopia, which according to the new best outcome performance--the 10 countries analysis and Roberts' study had a long period with the fastest improvement in primary com- of unit cost compression. pletion rates in the period 1997­2003. Primary How long unit costs can decline before completion progress signals not only that edu- major negative effects on quality are observed cation systems are rapidly expanding enroll- is related to the starting level of system effi- ments, but also that they are managing to ciency. In this sample of low-income coun- maintain reasonable internal efficiency and at tries, primary education unit costs around least minimally adequate quality--otherwise 2000 averaged about 12 percent of per capita dropout rates will increase. GDP but ranged widely--from 35 percent in The picture that emerges is consistent with Niger to 4 percent in Cambodia. This dispar- Roberts' (2005) education sector analysis. ity helps to explain why Niger's policy actions For at least some period, most of the 10 coun- to make the costs of primary schooling more tries achieved rapid enrollment expansion sustainable (box 2.1) have been such a key with no increase in real spending per student factor in the country's recent progress in (figure 2.4). Indeed, between 1990 and 2000, increasing enrollments and completion. unit costs declined in all the countries except Conversely, the increases in unit costs in one (The Gambia), as enrollment growth out- Cambodia since 1999 have clearly been nec- stripped budget growth. Since 1999, though, essary to improve quality. For Côte d'Ivoire, several countries have experienced significant Ethiopia, The Gambia, and Mali, despite the real increases in education spending, which sustained period of unit cost compression in has allowed unit costs to rise in four countries the 1990s, the unit cost in primary education and to remain constant in two. In the remain- around 2000 was still slightly above the low- ing four countries, however, unit costs con- income country average. However, cost com- tinued to decline through 2002. Almost all of pression has continued in the past few years in the countries have seen real budget growth, most of these countries--raising the question G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 59 C H A P T E R 2 of long-term sustainability of enrollment and transferred as technical assistance is large. As completion rate progress if budgets do not figure 2.5 shows, bilateral donors' reports to begin to keep pace with system expansion. the DAC indicate that at least 30 percent of Under the EFA FTI and GAVI, data on all education funding is spent on consultants, country expenditures, service delivery, and studies, or training. The 2004 DAC data are unit costs are beginning to be tracked more not complete, but they show a small decline systematically. This tracking should provide in the average share of donor aid transferred a stronger basis for monitoring the efficiency as technical cooperation and suggest that a of spending as aid flows and domestic spend- few donors, such as the United States, may be ing increase--and for learning from the coun- trying to reduce this share. On a growing vol- tries that manage costs and quality best. ume of aid for education, this represents some modest progress. Technical assistance can provide needed Making Aid More Efficient analyses, capacity building, and practical The increased volume of ODA for education experience. But it is also often badly coordi- and health is important. But its impact will be nated among donors and poorly prioritized; blunted unless it can be used for the core expen- rarely do donors compare study proposals to ditures countries incur to scale up service deliv- the alternative that, in some countries, 100 ery in education and health. All MDG costing days of consultancy support could equal the exercises have found the incremental financing annual cost of paying 100 teachers or keep- needs in health and education to be largely ing 5,000 children in school. The EFA FTI's recurrent expenditures, above all recurrent new Education Program Development Fund salary costs for health workers and teachers attempts to tackle this issue by pooling donor (Devarajan, Miller, and Swanson 2002; Bruns, resources for planning support and studies Mingat, and Rakotomalala 2003; United and by ensuring that these resources respond Nations Millennium Project 2005). Although to government priorities. But it is too early to even the poorest countries need eventually to judge whether this effort produces a net sustain their education and health systems reduction in technical cooperation as a share with domestic resources, many can achieve this of donor support to these countries--or clear goal only gradually, as their economies grow increases in coherence and quality. and fiscal capacities deepen. A second issue is predictability. In scaling up The first issue is the flexibility of external health and education services, developing- financing. A high share of today's ODA for country governments must take calculated risks health and education is transferred in forms that donor promises of future aid will materi- that cannot be applied to core budgetary out- alize to help fund long-term recurrent spending lays. A recent study of 14 countries receiving obligations. Yet studies of overall aid flows poverty reduction support credits found that show that commitments are highly volatile and only 20 percent of donor commitments were that disbursements are poorly correlated with provided as either general or sectoral budget commitments, generally lower than commit- support (Foster 2004). Fully 50 percent of ments, and no less volatile. Worse, volatility assistance ran outside the budget, and 30 per- tends to be procyclical, making it even harder cent escaped government reporting altogether. for countries facing other revenue shocks to If only 20 cents on each dollar of aid can be smooth recurrent expenditures, and volatility used to fill core financing gaps, true MDG rises with aid dependence (Eifert and Gelb financing needs might be five times those esti- 2005; Bulir and Hamann 2002, 2005). mated to date. Figure 2.6 shows the substantial annual With respect to education, the disconnect fluctuations in ODA disbursements for edu- between countries' need for flexible budget cation and health for a sample of low-income support and the high share of bilateral aid countries between 1998 and 2004. Although 60 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S FIGURE 2.5 Share of bilateral education ODA commitments reported as at least half technical assistance Germany Austria Greece Belgium Portugal France Switzerland Australia Canada Japan United States United Kingdom Finland Norway Denmark Sweden Bilateral donors 0 10 20 30 40 50 60 70 80 90 100 Percent 2001­3 2004 Source: OECD DAC database. there is a clear upward trend in almost all of tality (Bokhari, Gottret, and Gai 2005). More the cases, volatility around the trend line is research is needed, but the study suggests an substantial. The issue is that volatility is par- important possible reason that previous stud- ticularly crippling in the social sectors ies have typically found little correlation because of the high share of spending on per- between government health spending and key sonnel--80 percent in education and 60 per- health outcomes--the constraint on efficient cent in health. Unstable resources impede expenditure imposed by aid volatility. More new hiring, necessary salary adjustments to work is needed to develop systems of aid allo- retain skilled providers, and regular flows of cation that respond to performance on ser- salary payments to frontline workers, under- vice delivery yet ensure stable, long-term mining service delivery. flows of support (Eifert and Gelb 2005). A recent econometric analysis of child Finally, the transactions costs of access- mortality outcomes from 1995­2000 in 75 ing aid are high. Donors have made some developing countries found that both low lev- inroads on this issue with the 2005 Paris els and high volatility of donor funding for Declaration on Aid Harmonization and the health explained the relatively slow progress recent establishment of explicit targets for of some countries in reducing under-five mor- progress. In education, the EFA FTI is G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 61 C H A P T E R 2 FIGURE 2.6 ODA disbursements for education and health gets as well: 100 percent of donors use shared progress indicators, 100 percent conduct ODA disbursements for education joint evaluation studies, and 60 percent have US$ millions aligned their financing with the country bud- 70 get cycle (European Commission 2005). 60 In health, however, the consensus is 50 increasing that the situation has worsened in 40 recent years. The most difficult issue is the 30 large number of global health programs, which have introduced "vertical" streams of 20 assistance for specific health goals into coun- 10 tries' "horizontal" health systems. These pro- 0 1998 1999 2000 2001 2002 2003 2004 grams get high marks for raising global awareness of major health issues; attracting Bolivia Cambodia Ethiopia Nepal new funding for health; and getting countries, ODA disbursements for health donor agencies, private donors, and the for- US$ millions profit sector in health (notably the big phar- 60 maceutical companies) to collaborate on new 50 solutions to global health challenges. The spread of HIV/AIDS treatments, increased 40 immunizations, research on new vaccines, 30 and increased funding for diseases that dis- 20 proportionately afflict low-income countries 10 (malaria, riverblindness, Chagas disease, and dengue fever) can all be attributed to the 0 1998 1999 2000 2001 2002 2003 2004 advocacy and funding efforts of specific global partnerships. Bolivia Cambodia Ethiopia Nepal But these programs' success factors have a downside. Countries and their donor part- Source: World Bank estimates from OECD DAC database. ners are increasingly concerned that the increase in global health partnerships is also explicitly supporting achievement of the increasing transactions costs, duplicating and Paris targets among education donors and fragmenting health delivery services, distort- beginning to track progress. ing some countries' health priorities, and A recent report for the EFA FTI Secretariat undermining holistic fiscal and sectorwide examined donor practices in three African planning, when significant NGO activities countries. Although these countries are not supported by global funders are unknown to necessarily representative of FTI countries, public officials. the data paint an encouraging picture. Edu- The planning cycles, coordinating mecha- cation donors in these countries are well nisms, appraisal processes, financing channels, ahead of donors in general on the Paris tar- surveillance metrics, procurement require- gets. In all three countries 100 percent of ments, and audit and reporting requirements donor support is "on plan," aligned to the of global health programs can differ from pro- FTI-endorsed national education sector strat- gram to program and from governments' egy, 100 percent of commitments are multi- health systems. Although weak expenditure year, and 100 percent of donors participate in management in some countries may justify an annual government-led review of sector ring-fenced donor funding channels, it does performance. In Burkina Faso education not justify a plethora of channels and proce- donors have reached several other Paris tar- dures. Nor does it justify multiple coordina- 62 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S tion mechanisms: Angola and the Democratic back" on global health partnerships and Republic of Congo have each been required to bilateral funders to insist on harmonized indi- establish four HIV/AIDS coordinating bodies. cators, joint monitoring, and pooled funding. Nor does it justify the high cost of multiple A proposal currently being developed reports: hosting missions and writing reports would commit donors and countries to a for different health programs is estimated to shared set of principles and establish a small absorb 50­70 percent of the time of a district global secretariat to monitor and support medical officer in Tanzania (McKinsey and adherence to these principles at the country Company 2005). Multiple parallel procure- level. The "good practice" principles being ment requirements have not only increased discussed are joint commitment by countries countries' administrative costs, but also re- and their donor partners to duced their bulk purchasing power. Initiatives such as the "three ones" and the Global Task one unified, country-led health sector plan Team on HIV/AIDS aim at improving coordi- aligned with the PRSP, covering all nation, but there is clearly room for progress. actors--the national health system, the Concerns are also being raised about the private sector, and NGOs; long-term fiscal sustainability of donor- reliance on country systems, budget frame- induced shifts in health spending, particularly works (such as the medium-term expendi- in connection with HIV/AIDS programs. ture frameworks), reporting arrangements, Although developing countries have increased and aid coordination mechanisms; domestic funding for these programs since support for strengthening health system 2000, this increased funding is dwarfed by the capacity; 300 percent rise in external support, largely a results focus; and from multilateral sources such as the Global a medium-term to long-term (10-year) Fund. About 60 percent of total AIDS pro- horizon for aid commitments and greater gram spending in developing countries is now predictability. externally financed, and this share is much higher in many African countries. In Ethiopia Since the forum, at least three global in 2003­4, external funding for HIV/AIDS health partnerships have discussed the best equaled the overall public health budget. And practice principles at their board meetings. in both Uganda and Zambia, AIDS funds Given the limited consensus on the same exceeded public health spending by almost issues among donors for health just one year 185 percent (Lewis 2005b). earlier, the current climate is promising. At the December 2005 High-Level Forum on the Health Millennium Development Reducing Leakage Goals, health ministers from a range of devel- oping countries agreed with bilateral and Donor support for increased and more flexi- multilateral donor representatives that action ble aid hangs crucially on countries' ability to is urgently needed to address transactions demonstrate effective use of that support. Yet costs and sustainability issues in health. Par- leakage--or the failure of resources to be ticipants noted that countries with strong uni- used effectively for intended purposes--is an fied health sector plans--such as Bangladesh, acknowledged issue in developing countries China, Ghana, the Kyrgyz Republic, Tanza- where governance systems and accountability nia, and Vietnam--had been more successful pressures are often weak. Even where the pri- than others in using support from global vate sector plays a key role in health, educa- health partnerships without distorting their tion, or water and sanitation service delivery, own health sector priorities. Countries with achieving the MDGs will depend fundamen- strong leadership on HIV/AIDS, such as tally on developing countries' ability to Rwanda, also report success in "pushing strengthen public sector performance. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 63 C H A P T E R 2 Not all leakage is corruption. Poor man- required in kickbacks to public officials agement can lead to the wrong choice of tech- (World Bank 2000). In Venezuela and Costa nologies, suboptimal allocations of resources, Rica, over two-thirds of medical staff and other inefficiencies that benefit no one in reported knowledge of stolen materials, particular: badly designed subsidy programs equipment, or drugs, and in Uganda or unbalanced education budgets that leave researchers estimated the average leakage rate teachers with no books, new construction for drugs across public facilities at 73 percent inaccessible to people with disabilities, and (McPake and others 1999). Parallel issues inappropriate drug purchases. exist in education--procurement fraud in But health and education systems have fea- construction and theft and misprocurement tures that create special opportunities for pri- of textbooks--but the market value of school vate gain at public expense. Asymmetric books is lower than for drugs, and construc- information between providers (doctors, tion is often less equipment intensive. teachers) and their patients or students give Leakage of funds allocated to front-line the providers heightened power to extract facilities. More systematic information is private payments for public services that emerging from public expenditure tracking should be free. The inherent decentralization studies (PETS) on the extent to which funds of school and health systems makes it hard to budgeted for schools, clinics, or specific pro- monitor performance on the front line and as grams fail to reach intended levels. Surveys in a result gives rise to absenteeism, theft, and more than a dozen countries have consis- shirking of duties. Large-scale procurement tently found discrepancies, although the scale and payment systems, especially in health, varies considerably. In Ghana, for example, create scope for graft and theft, as seen in only 20 percent of budgeted nonwage trans- developed countries as well. Finally, rapid fers to health clinics were actually received, increases in external funding, particularly for and only 51 percent of transfers to primary HIV/AIDS programs, can pressure govern- schools. Clinics in Tanzania received only 59 ments to disburse large amounts of funding percent of nonwage transfers. Very com- quickly, sometimes through wholly new insti- monly, funds are received only with substan- tutional channels. Recent studies provide tial delays. growing evidence of three different types of Front-line service failures. Their aggregate leakage. size may or may not be as large as losses at the Central losses. Very little systematic infor- center, but the most widespread losses and mation exists on "losses at the top" of devel- abuses in health and education systems occur oping-country education and health systems. on the front lines--providers absent from Although the scale of such losses cannot be duty and providers demanding informal pay- estimated, they are clearly the point at which ments for services that are legally free. Cross- the most concentrated leakage of government country studies show, on average, that one and donor funds occurs. health worker in three is missing during In health, the hospital sector typically rep- unannounced facility visits, although there is resents 30­50 percent of public health spend- a range. Absentee rates in education average ing and its large-scale, often centralized about half that. Provider absence seriously procurement presents clear opportunities. In disrupts service delivery, lowers system pro- Colombia procurement overpayments were ductivity, and depresses the demand for ser- estimated at $2 million a year, enough for vices. Researchers in India found that facility health insurance coverage for 24,000 people closures followed no pattern, meaning that a (Di Tella and Savedoff 2000). In Ghana sur- patient's likelihood of finding a provider was vey respondents estimated that 21 percent of unpredictable (Bannerjee, Deaton, and Duflo hospital procurement was corrupt and that 2004). The deterrent to seeking services is 18 percent of a contract's value was typically thus high. 64 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S Many reasons for absence are legitimate, accountable for resource use and if incentives including rural workers' need to travel to dis- exist for performance. tant towns for paychecks or supplies. Low Corruption at the top levels of health and salaries and payment arrears, which force education systems is harder to root out, and many competent and committed providers to additional resources can simply increase the work second and third jobs to survive, are opportunities. The recent mismanagement of clearly root causes of much absenteeism. But funding for HIV/AIDS programs in Kenya, weak accountability pressures also contribute; Uganda, and the Ukraine provides glaring absentee workers rarely face sanctions. examples (Transparency International 2006). Equally pervasive are informal payments. Weak management systems can be In health, patients can be impelled to pay to improved, however, and corruption can be be seen by a physician, to be admitted to hos- curbed; later chapters of this report examine pital, to move up in the queue, to get an the cross-country experience with strategies to exemption from official fees, or to ensure bet- strengthen governance. Health and education ter-quality treatment, as well as for basic sup- systems typically need to strengthen account- plies and services, such as blood supplies, ability relationships along two axes of the drugs, food, or bed sheets. Informal pay- "accountability triangle" presented in World ments are also seen in education--for tutor- Development Report 2004: (1) strengthening ing, for graduation, for passing grades, and system management--that is, policy makers' even for university access. The wedge ability to contract with providers--and (2) between public sector pay scales and what strengthening "client power" or users' ability providers can command in the market con- to demand better service from providers tribute to the demand for informal payments. (World Bank 2004b). In both areas, many So does the absolute insufficiency and irregu- developing countries are making progress in larity of recurrent budget transfers to the putting transparency and new accountability facility level in many countries. Without relationships to work. informal payments, service delivery would be The following are some of the most impossible in many places. promising strategies for improving system Informal payments disproportionately hurt management: the poorest. In about half of the 29 countries with data, the average informal payment for Use transparent allocation rules, proce- publicly provided health care was more than dures, and the power of information to one-quarter of monthly per capita income-- reduce leakage. Clear rules and procedures clearly imposing a hardship on low-income concerning the basic package of services to families (Lewis 2005b). In such environments, which people are entitled, fee scales, major illnesses pose a deep threat to families, resources a school or clinic should receive, forcing them to sell assets or incur debt to and effective basic accounting and record obtain needed medical care (Lewis 2000; keeping can have immediate impacts. Tbil- Falkingham 2002, 2004; Killingsworth and isi Children's Hospital began posting lists others 1999). Evidence from Kazakhstan of fees, and informal payments fell. Cash showed poor households spending more than registers were installed in Kenyan hospitals twice their monthly income for health care in to collect user fees and revenues rose 400 acute cases (Lewis 2005b). percent in three years, with no change in Although increased aid could ease the con- utilization rates (Vian 2006) . Transfers to ditions that spawn poor service delivery and schools in Uganda went up when the gov- corruption on the front lines--the low and ernment openly publicized allocations in irregular pay, the ill-maintained facilities, the the press and on each school's door. shortages of books, supplies, or medicines-- Measure results, performance, and impact. it can do so only if system managers are Clear measures of output and performance G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 65 C H A P T E R 2 are fundamental for systems improvement. Accountability will be strongest if educa- Parents are ill-equipped to evaluate the tion and health systems need to answer to quality of local schools without data on stakeholders on the performance of public how well their students are learning com- services. Reforms that are increasing "client pared to students at similar schools. Basic power" in different countries include: data on education and health system per- formance is fragmented and two or more Involve communities in monitoring and years out of date in most developing coun- management. An increasing number of tries. Both to better manage the resources countries in all regions are devolving some they have as well as to make the case for control over schools and health clinics to more support, countries need robust, real- local communities. In Rwanda community time information on systemwide outcomes councils are being given the power to hire and intermediate results (primary comple- and fire health clinic personnel and deter- tion rates, immunizations and other services mine bonus pay. In Brazil, El Salvador, delivered, morbidity and mortality data). Guatemala, Honduras, India, Mexico, and Implement a credible and effective audit Nicaragua, among other countries, village function. In Brazil and Chile, the capacity education committees and parent-teacher of the federal government to conduct ran- associations have a voice in hiring teachers dom audits of enrollment records and bud- and managing school accounts. Creating gets was crucial for the implementation of formal oversight bodies at the community large-scale financing reforms that pay level can place strong accountability pres- schools on the basis of attendance, creat- sures on local providers. ing powerful new incentives for schools But unleashing this client power often and mayors to get hard-to-reach children requires significant efforts to inform com- into school. munities of their responsibilities and to Focus on provider quality, deployment, build their skills to shoulder them. In and incentives. Skilled providers are the India, two years after village education most expensive resources in health and committees were mandated to receive education systems; recruiting, deploying, direct school funding, only 12 percent of equipping, and supervising them carefully rural households surveyed in northern are key for the productivity of spending. India knew about it, and only 26 percent Average salaries may need adjustment in of the committees had met in the previous many contexts, but research also shows six months (Pandey 2005). In Brazil, in that nonsalary inducements (such as hous- the poor rural municipalities where audi- ing, training, research opportunities, and tors found irregularities in the use of fed- public recognition) are as important as erally transferred funds, the community salary incentives for providers' motivation councils created to supervise the transfers and development. Systems also need the admitted they lacked the skills and power authority to reward performance, and dis- to challenge local mayors (Transparency cipline, transfer, or terminate employees International 2004). who engage in abuses. Technology may help; a program in India that provided dig- Efforts to equip communities with better ital cameras (with a tamper-proof time and information, such as the "report cards" on date function) to remote rural primary schools' performance being developed in schools and rewarded teachers who sup- Cambodia and the training journalists in plied one picture per day of the class in ses- Benin receive to report on local school com- sion found teacher absence went down to mittee meetings, are important steps to shift 22 percent compared with 42 percent in what is often an imbalance in status, knowl- control schools (Duflo and Hanna 2005). edge, and power between providers and 66 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S beneficiaries, especially the poor. Letting where child mortality increased between clients provide feedback on the quality of 1999 and 2003. public services--for example, through "cit- Seven of 10 countries are making strong izen report cards"--is also empowering, as progress in child immunizations, and in a signal from the public sector that citizens' almost all of these the poor are benefiting views are valued. most. Donors are legitimately concerned about the Better quality antenatal care is also reach- risks of providing flexible aid where public sec- ing the poor. tor performance is weak. But, as noted above, Several countries--including Bangladesh, the core financing need in most low-income Kenya, Morocco, and Mozambique (where countries for increasing health and education outcomes for the poor have improved, while services remains recurrent personnel costs. the average has not)--are reducing child Stronger capacity across mainstream ministry malnutrition faster for the lowest income functions--planning, budgeting, and expendi- quintile than for the population average. ture management--is clearly needed. Better Eight of the 10 countries have improved pri- quality and more timely administrative data on mary completion rates, and in five of these, system performance are also needed, because the poorest quintile has improved most. they provide the platform to track results for money spent. And donors' support must be Child mortality declined in 9 of the 10 guided by credible sector strategies that address countries between 1998­9 and 2003­4, and key constraints, clarify accountability, and in Indonesia, Madagascar, and the Philip- improve incentives for performance. pines the current pace of decline (more than 4.3 percent a year) is sufficient to reach the MDG (figure 2.7). In Madagascar the annual Doing More to Reach the Poor rate of improvement since the MDG baseline The MDGs aim to extend human welfare year, 1990 (­2.3 percent per year), puts it off improvements to all countries. But some of the track to meet the MDG in global estimates, goals--especially in health--can be achieved but the new data show that progress has through investments that primarily benefit the accelerated sharply over the last several years. better-off, while largely bypassing the poor Among Indonesia, Madagascar, and the (Gwatkin and others 2000). Last year's report Philippines, however, only Indonesia has seen showed that two-thirds of the countries that the improvement for the poorest quintile keep had reduced child mortality from 1990 to pace with that for the population average. 2001 saw a widening gap in outcomes for In Bolivia, Cameroon, and Mozambique, families in the lowest income quintile. And on the other hand, outcomes for the poor are although education progress has been more improving faster than the mean, but the over- pro-poor, in one-third of the countries that all rate of improvement is not fast enough to improved primary enrollments from 1990 to reach the MDG. In Bangladesh, Burkina 2002, the poorest have lagged behind. Faso, and Morocco, the poorest quintiles are Since 2002 a new wave of demographic lagging, but the gaps are not wide. and health survey data has become available, Immunization coverage is also improving shedding light on countries' more recent in many of these countries, with impressive strategies and progress--and capturing expe- progress in reaching families in the poorest rience since the MDGs were adopted. Analy- quintile. Except in Bangladesh (which already sis of the 10 developing countries with survey had a very high level of immunizations) and data for 2003 and 2004 shows the following: Madagascar (where there is a slight gap), the poorest groups have experienced much Nine of 10 are making rapid progress on greater improvement in access to immuniza- child mortality. The exception was Kenya, tions than the population as a whole. In three G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 67 C H A P T E R 2 FIGURE 2.7 Annual reductions in child mortality (number of child deaths per 1,000 live births) 5.6 Madagascar, 1997­2003/4 106 4.3 4.7 Indonesia, 1997­2002/3 53 5.5 4.5 Philippines, 1998­2003 42 3.3 4.1 Bolivia, 1998­2003 75 4.8 3.7 Bangladesh, 1999/00­2004 94 3.3 3.6 Burkina Faso, 1998/99­2003 190 3.3 3.4 Morocco, 1992­2003/4 51 2.6 2.6 Mozambique, 1997­2003 178 4.1 0.6 Cameroon, 1998­2004 141 0.9 ­0.8 Kenya, 1998­2003 ­1.9 109 ­2 ­1 0 1 2 3 4 5 6 Percent annual change Poorest quintile Population average Source: World Bank estimates from Demographic and Health Surveys. Note: The boxed numbers show the number of child deaths per 1,000 live births in the most recent survey. of the countries, however, no improvement was would respond in the affirmative. Although registered. While in the Philippines the average these survey data permit no clear answers, level of immunization coverage is quite high, they do provide some encouraging evidence in Kenya and Indonesia, it is not. It should be that key health interventions, such as immu- recalled, however, that this period was a time nizations and access to trained providers for of economic crisis in Indonesia, which makes antenatal care, are spreading quickly and the country's continued progress in addressing increasingly reaching the poorest groups, at child mortality all the more impressive. least in this sample of countries. What explains these different patterns? In education the picture is also one of Progress on child mortality reflects complex progress; primary completion increased sub- determinants (such as mothers' education, stantially in three countries and more modestly household income, and household access to in five others. Two countries, however, (Kenya water and sanitation), many of which can be and Bolivia) experienced declines, especially slow to change. Is there a trade-off between among the poorest quintile (figure 2.9). When faster aggregate progress toward key goals, considering these data, it is important to such as child mortality, and progress for the remember that they reflect changes in the edu- poor? Given the higher marginal costs of cation system and participation rates from extending basic services to rural areas, where roughly a decade ago, as they are based on a high share of the poor live, many observers reported schooling attainment for the 15­19- 68 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S FIGURE 2.8 Delivery of immunizations 12.0 Burkina Faso, 1998/99­2003 13.9 44% 7.4 Bolivia, 1998­2003 8.2 50% 7.3 Madagascar, 1997­2003/4 53% 7.0 5.8 Cameroon, 1998­2004 48% 9.1 5.3 Bangladesh, 1999/00­2004 73% 3.5 4.7 Mozambique, 1997­2003 64% 18.1 1.5 Morocco, 1992­2003/4 4.3 89% ­0.8 Philippines, 1998­2003 ­1.4 70% ­0.9 Kenya, 1998­2003 ­3.4 57% ­1.0 Indonesia, 1997­2003/4 ­1.3 51% ­6 ­4 ­2 0 2 4 6 8 10 12 14 16 18 20 Percent annual change Poorest quintile Population average Source: World Bank estimates from Demographic and Health Surveys. Note: The boxed numbers show the immunization coverage (for children 12­24 months) in the most recent survey. year-old cohort of the population. The five women had heard of AIDS) to 2004 (29 per- countries with modest annual improvements cent), but there is clearly a long way to go. And are, with the exception of Cameroon, coun- in both Indonesia and Bolivia, awareness did tries that have already achieved close to uni- not increase over the period. versal primary enrollments and relatively high primary completion, so it is logical that mar- Investing Smartly across Sectors ginal changes should be lower. In half of the countries, the poorest quintile improved more Water supply and sanitation investments have than the average. Mozambique and Burkina important effects on health, especially child Faso were exceptionally progressive in reach- health. Nearby water and school latrines can ing the poorest children over this period. dramatically change mothers' ability to care Finally, the recent surveys provide clear evi- for their children and girls' school attendance. dence that awareness of HIV/AIDS has become Roads improve school attendance and use of almost universal in Sub-Saharan Africa, but far health facilities. And health and education less so in other regions. In Bolivia, Indonesia, investments have clear complementary effects: and Bangladesh, less than 33 percent of women mothers' education is a strong correlate of child in the lowest-income quintile have "heard of" survival, and school attainment is affected by HIV/AIDS. In Bangladesh there was improve- family illness, especially HIV/AIDS. There is no ment from 1999 (only 8 percent of low-income single route to MDG progress. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 69 C H A P T E R 2 FIGURE 2.9 Share of 15­19-year-olds who have completed primary school 9.7 Mozambique, 1997­2003 4.1 7.9 Madagascar, 1997­2002/3 8.1 7.8 Burkina Faso, 1998/99­2004 10.4 2.7 Morocco, 1992­2003/4 3.3 1.9 Bangladesh, 1999/00­2004 7.3 1.3 Cameroon, 1998­2004 0.3 1.0 Indonesia, 1997­2002/3 0.1 0.0 Philippines, 1998­2003 0.5 ­1.0 Kenya, 1998­2003 ­8.1 ­2.1 Bolivia, 1998­2003 ­5.4 ­8 ­6 ­4 ­2 0 2 4 6 8 10 12 Percent annual change Poorest quintile Population average Source: World Bank estimates from Demographic and Health Surveys. Research on what infrastructure invest- tion found clear health benefits for children ment means for human development out- under age five: 20 percent less diarrhea and comes shows that effects can be large. In anemia and 12 percent less infection with Zimbabwe a carefully controlled study of parasites. The improved health also trans- preschool children found that those living in lated into better brain development (children households that used wood-burning stoves in the treatment homes scored 8 percent for cooking were more than twice as likely higher on cognitive tests), and older children to suffer from acute respiratory infections missed fewer days of school. (ARIs) as children in homes with natural gas Donors and governments concerned about or electrification (Mishra 2003). ARIs are one making money work need to give priority to of the leading causes of childhood illness and establishing careful baseline studies and robust death in Africa, and it is not clear that any control groups wherever possible before direct health intervention could produce a 50 launching innovative programs. Donors also percent drop in their incidence. need to recognize that the knowledge that In Coahuila, Mexico, the "piso firme" pro- comes from rigorous impact evaluation is a gram has upgraded dirt floors to cement global public good and needs to be heavily floors in slum housing, benefiting more than supported, especially in low-income countries. 34,000 people since 2000. An impact evalua- Developing-country policy makers can provide 70 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 M A N A G I N G M O N E Y F O R H U M A N D E V E L O P M E N T R E S U L T S a demand-side stimulus to good impact evalu- cies are sound, fiduciary conditions are ation by asking, "Where's the evidence?" when adequate, and the capacity to measure sec- considering new policies and programs. tor outcomes and intermediate indicators is in place, donors should shift assistance Priorities for Global Action as much as possible to budget support. This shift will permit countries to scale up Evidence of tangible progress toward the health and education coverage most effi- MDGs is greater today than one year ago. ciently and lower the costs of attaining the Many low-income countries have acceler- MDGs. Donors and countries should plan ated progress on primary completion. Child- multiyear expenditure programs on a dis- hood immunizations have increased greatly bursements rather than a commitments and are reducing needless child deaths. basis, and the schedule for donor dis- National malaria campaigns are getting vis- bursements should be clear over at least a ibility and distributing bed nets and treat- three-year horizon, extended annually. ment on a larger scale than ever before. HIV Improve measurement of results, perfor- prevention programs are beginning to work, mance, and impact. Developing countries and the extension of effective drug therapies seeking flexible aid need to demonstrate to AIDS victims in the developing world has adequate public expenditure management. been rapid. But they also need the ability to track edu- Development assistance for the MDGs cation, health, water and sanitation sector has increased sharply, and donor support performance on a timely and reliable basis, appears to be more targeted than ever to the so that donors can have real-time data lowest-income countries with country-owned comparing spending and results. These poverty reduction strategies and commitment data include data on key outcomes, as well to these goals. Countries have made progress as intermediate indicators, and accurate in expanding service coverage while manag- financial reporting at all levels of the sys- ing unit costs. But the world is still far from tem. Countries should insist on rigorous achieving the human development MDGs; evaluation of pilot programs to guide deci- donors and countries must keep working on sions on where to increase spending. ways to speed the pace of progress. The Because such evaluations can be expensive analysis in this chapter points to six priority and have a high element of global public areas for global action: good, donors need to increase their sup- port for them. Accelerate harmonization in health. Monitor outcomes of the poorest groups. Global health partners need mechanisms Extending basic health, education, water for aligning policies and programs and for and sanitation to the poorest segments of harmonizing procurement, disbursement, the population can be difficult and costly. and reporting at the country level, as well Donors should support country policy as a mechanism for coordination and choices that make investments more pro- intermediation at the global level. The edu- poor, even at the risk of slowing overall cation sector through the EFA FTI has progress on reaching the MDGs. These made notable progress in developing both choices will hinge on countries' ability to global and country coordination mecha- track outcomes by income group, gender, nisms that are improving donor alignment ethnicity, and region. Regular household and lowering transaction costs. A parallel surveys are essential. mechanism is urgently needed in health. Strengthen the accountability of health, Increase the flexibility and predictability of education, and water and sanitation sys- ODA for social sectors. Where sector poli- tems. Achieving the MDGs depends above G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 71 C H A P T E R 2 all on more effective delivery of basic the MDGs. Sorely needed is a parallel effort health, education, water and sanitation by the Bretton Woods institutions to ensure services in many countries. Countries will shared standards and classifications in the make the most progress if they find ways collection of government expenditure data to strengthen sector management, the and to unify these in a single, standardized incentives for providers, and the voice of cross-country database. clients at the point of service delivery. Develop a systematic cross-country data- Notes base of public expenditures on social sec- tors. The OECD DAC has made good 1. Note that the data for 1990, 1995, and 2000 are not comparable to those presented in progress over the past two years in upgrad- Global Monitoring Report 2005 because of a ing the quality and timeliness of cross- change in the series. country data on ODA, in part in recognition 2. The WHO Expanded Program of Immu- that these data are crucial for monitoring nization (EPI), which Bangladesh followed, vacci- progress in implementing the Monterrey nated children against six diseases: diphtheria, accords and donor commitments related to measles, pertussis, polio, tetanus, and tuberculosis. 72 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 3 Delivering on Commitments for Aid, Debt Relief, and Trade T he "year of development" sharpened the more of the increment is available for pursu- international community's focus on aid ing the MDGs make it particularly important and trade, providing an unprecedented to strengthen monitoring of donor commit- opportunity to accelerate achievement of the ments and flows. Scaling up will also require Millennium Development Goals (MDGs). more coordination among aid delivery chan- Reaffirming the Monterrey Consensus (United nels--bilateral funds, multilateral funds, Nations 2002), donors promised a major global funds, and private funds. expansion in official development assistance At the country level, a strengthened poverty (ODA) and strongly backed efforts to enhance reduction strategy (PRS) process and enhanced the quality of aid. They also agreed to provide consultative group and roundtable (CG/RT) wider and deeper debt relief to the poorest coordination mechanisms will be central to countries. While trade liberalization through implementing the scaling up and results agenda. unilateral reforms and regional agreements Drawing on the PRSs, enhanced CG/RT moved ahead, multilateral negotiations under processes can provide a practical, mutual the Doha process made only modest progress. accountability framework for linking resources By contrast, considerable momentum was built to results. on aid for trade. The Paris Declaration in March 2005 gave Donors are delivering more assistance, and a boost to the aid effectiveness agenda. Build- the prospects for scaling up aid have bright- ing on the principles of ownership, alignment, ened. At their summit in Gleneagles, the harmonization, managing for results, and Group of Eight (G-8) leaders pledged to mutual accountability, the Paris Agenda speci- increase aid to Africa by $25 billion a year by fies monitorable actions to improve aid quality. 2010--more than doubling assistance to the Broad-based support for this agenda has trans- region--and Development Assistance Com- lated into progress at the global level, such as mittee (DAC) members have agreed to adoption of global targets (for 2010) for the 12 expand aid to all developing countries by indicators in the Paris Declaration, and at the about $50 billion. These commitments call country level, such as customizing several indi- for a much faster pace of ODA growth (when cators and targets to the country context. public budgets could be under pressure), Much remains to be done, however, and vigor- introducing some uncertainty for future ous implementation of the agenda is needed to flows. Scaling up assistance and ensuring that deliver more effective development assistance. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 73 C H A P T E R 3 Major progress was made in 2005 in gled, bilateral and regional trade agreements extending and deepening debt relief to the (RTAs) continued to mushroom during 2004­5, poorest countries. The G-8 Proposal (now and unilateral reform continued at a steady called the Multilateral Debt Relief Initiative) pace in several regions, reflecting reductions in to cancel 100 percent of the debt that heavily tariffs for agricultural products entering high- indebted poor countries (HIPC) owe to the and middle-income countries and liberalization African Development Fund (AfDF), Interna- by developing countries in manufacturing and tional Development Association (IDA), and agriculture. The level of protection in least the International Monetary Fund (IMF) will developed countries (LDCs) remained essen- cut the external debt of these countries by tially unchanged. Barriers to products originat- another $50 billion. Nineteen countries have ing in high- and middle-income countries already received $3.4 billion in debt relief experienced the greatest reduction. from the IMF under the Multilateral Debt Following high-level political endorsement Relief Initiative (MDRI); IDA's Board of Exec- at the G-8 meeting in Gleneagles, proposals for utive Directors has approved MDRI financing significantly increasing aid for trade were and implementation modalities for IDA, and endorsed by the governors of the World Bank those for AfDF are due for consideration and Group and the IMF at their annual meetings. approval by the AfDF Board of Executive The Hong Kong ministerial created a task Directors in April. The MDRI initiative will force to operationalize aid for trade and a con- greatly reduce the debt burden indicators in sultation process to identify ways of increasing HIPC and create fiscal space for growth and resources. Meanwhile, donors are substan- human development objectives. To realize the tially increasing the resources for aid for trade, potential benefits of debt relief, recipient continuing a trend over the last few years. The countries need to strengthen their public next year promises to be critical, as initiatives expenditure management. They also need to launched in 2005 begin to bear fruit, but chal- manage postrelief borrowing so as not to lenges remain in ensuring that the increased undermine long-term debt sustainability. aid is both additional and effective. The MDRI commits donor countries to providing additional resources to ensure that the proposed debt forgiveness does not Aid Volumes and Quality undermine the ability of the three multilater- Rising Aid Levels als to continue to provide financial support to low-income countries--or the institutions' Assistance from DAC countries was nearly overall financial integrity. IDA and the AfDF $80 billion in 2004, up from $69 billion in have established baselines for assessing the 2003, and it rose to an estimated $106 billion additionality of donor financing. Monitoring in 2005, boosted by $19 billion in debt relief against these baselines is needed to avoid sub- to Iraq and Nigeria (OECD 2006a, 2006c). stitution between regular donor contribu- While nominal net ODA has risen by more tions and debt relief compensation and to than 50 percent from 2001 to 2004, the improve mutual accountability. increase measured in real terms (at constant The Doha Development Agenda has great exchange rates and prices) is more modest at potential to help reduce global poverty, but 18 percent--an average annual growth rate of progress was modest at the Hong Kong minis- 5.6 percent. But 2004 did see a strengthening terial meeting in December 2005. World Trade in the pace of the ODA trend that continued Organization (WTO) members face a challenge in 2005 (ODA increased by 31.4 percent in in concluding the Doha Round by the end of real terms in 2005), partly in response to spe- 2006: all must raise their sights to avoid losing cial factors.1 Higher aid flows mirror an a good opportunity to harness trade for increase in DAC countries' aid effort; ODA as growth. While multilateral liberalization strug- a share of gross national income (GNI) 74 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E FIGURE 3.1 DAC members' net ODA, 1990­2005, and prospects for 2006 and 2010 2004 US$ billions Percent 140 0.35 120 0.30 100 0.25 80 0.20 60 0.15 40 0.10 20 0.05 0 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 ODA projections ODA ODA/GNI Projected ODA/GNI Source: OECD 2006a, 2006c. Note: The data for 2005 are preliminary. climbed from 0.22 percent to 0.26 percent in surged in 2005 in response to a string of cat- 2001­4 and to 0.33 percent in 2005 (figure astrophic natural disasters such as the Indian 3.1). Only five donors have ODA/GNI ratios Ocean tsunami of December 2004 and the at or above 0.7 percent. South Asia earthquake of October 2005. ODA from non-DAC donors that report Global private giving for tsunami-related flows to the DAC rose by 9 percent (in nominal humanitarian relief was $5.1 billion or 38 terms) to $3.7 billion in 2004.2 Saudi Arabia percent of the $13.4 billion of total amounts continued to account for the largest share of pledged (Inderfurth and others 2005). assistance by this group. Other donors are Rising ODA volumes offset the overall beginning to emerge in importance, including decline in official nonconcessional lending. Net Korea, Kuwait, Taiwan (China), and Turkey. nonconcessional lending by multilaterals slid New European Union (EU) members that are further in 2004 because of less borrowing from not DAC members are also beginning to pro- the IMF and other multilaterals and because of vide larger volumes of aid.3 Elsewhere, major prepayments (see chapter 4); large prepayments emerging market countries, such as China pulled down multilateral net lending in 2005. and the Russian Federation, are playing an Nondebt private flows, by contrast, have increasing role in development assistance. shown a rising trend in recent years: foreign Data on so-called South-South assistance are direct investment (FDI) flows rebounded in incomplete, however, making it difficult to 2004 and continued to rise in 2005; inward obtain comprehensive information on South- remittances to developing countries continued South aid volumes and prospects.4,5 to surge. However, for poor countries, espe- Private giving is increasing. Grants from cially in Sub-Saharan Africa, ODA continues to nongovernmental organizations (NGOs) grew be the largest source of external financing. at a brisk pace in 2004, providing over $11 Nearly half the increase in net ODA from billion in assistance in 2004. Private giving 2001 to 2004 has been in the form of debt G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 75 C H A P T E R 3 FIGURE 3.2 ODA increases concentrated in a few countries Much of the increment in ODA (from all donors) reflects global and regional security Top 10 recipients of the increase concerns, with Iraq and Afghanistan account- in net ODA, 2001­4 ing for over half of the increase in net ODA Iraq from 2001 to 2004 (figure 3.2). Among other Afghanistan large recipients are the Democratic Republic Congo, Dem. Rep. of of Congo and Madagascar, with additional Angola aid mostly reflecting debt relief. Madagascar Sudan Zambia Brighter Prospects for ODA? Ghana Senegal At their summit in Gleneagles, G-8 leaders Ethiopia committed to increase aid to Africa by $25 bil- 0 1 2 3 4 5 lion a year by 2010, more than doubling assis- 2004 US$ billions tance to the region. Coupled with pledges by the EU, DAC members have also agreed to Source: OECD DAC database. expand aid to all developing countries by about $50 billion. These promises would relief and technical cooperation, a quarter raise the average share of ODA to GNI to was for emergency assistance, and a tenth for 0.36 percent in 2010. In May 2005, the 15 flexible bilateral forms of financing (table DAC EU members set an intermediate target 3.1).6,7 Although there was a shift toward for their collective ODA/GNI of 0.56 percent flexible forms of financing in 2004, the broad for 2010 and revised upward their target for pattern observed over the past few years is 2006 to 0.42 percent from 0.39 percent.8 likely to continue in the near term as debt for- They also reaffirmed their commitment to giveness for Iraq and Nigeria are reflected in reach an ODA to GNI ratio of 0.7 percent by ODA flows and as humanitarian relief efforts 2015. These pledges represent a $38 billion remain high. increase (in 2004 U.S. dollars) in ODA by TABLE 3.1 Composition of net ODA: less reliance by donors on special-purpose grants in 2004 (all levels are in constant 2004 US$ billions) Distribution of the ODA level ODA level ODA level Increase in Increase in ODA increase in ODA from 2001 2003 2004 ODA in 2004 from 2001 to 2004 2001 to 2004 (in %) DAC ODA 67.4 75.1 79.5 4.4 12.1 DAC ODA by type Special-purpose grants 29.6 40.6 38.4 ­2.2 8.8 73 Debt forgiveness 3.5 9.1 7.1 ­2.0 3.6 30 Technical cooperation 17.0 19.7 18.8 ­0.9 1.9 15 Food aid + emergency relief 5.5 8.0 8.5 0.5 3.0 25 Administrative costs 3.7 3.8 4.0 0.2 0.3 2 Flexible bilateral ODA 14.8 13.2 16.0 2.8 1.2 10 Contributions to multilaterals 23.0 21.4 25.1 3.8 2.1 17 Non-DAC ODA 1.6 3.7 3.7 0.0 2.2 Grants by NGOs 8.7 10.9 11.4 0.5 2.6 Source: OECD DAC database. Note: Flexible ODA is DAC members' ODA less special-purpose grants and contributions to multilaterals. 76 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E 2010 for EU members that are DAC coun- the growth of ODA required to meet commit- tries, a near doubling of assistance for this ments will be much greater. A faster pace of donor group. Several DAC members have also growth of aid (when public budgets are under announced a timetable for achieving an ODA pressure) could introduce some uncertainty in target of 0.7 percent of national income. If medium-term aid volumes. DAC countries' commitments are delivered, Although much of the expansion in ODA ODA measured in 2004 prices will be around has been delivered in the form of special pur- $100 billion in 2006 and will rise to about pose grants (table 3.1), beyond the near term, $128 billion by 2010. the proposed doubling of aid to Africa by To achieve these targets, ODA will need to 2010 and the completion of major debt grow at an accelerated pace. Overall, real workouts are expected to shift the pattern of ODA will need to grow 50 percent faster from aid delivery. Moreover, if donors deliver on 2004 to 2010 compared with the average commitments, the pattern of distribution of annual growth rate from 2001 to 2004 (figure aid to poor countries could change as well. 3.3); for EU members that are DAC countries, the pace of growth will need to triple. Imple- Funding Development Assistance through mentation of Paris Club debt agreements for Innovative Mechanisms Iraq and Nigeria boosted aid volumes in 2005, and debt forgiveness grants will remain Innovative financing mechanisms could aug- high in 2006. Beyond the near term, more of ment aid flows and development investment the increase in ODA will represent a transfer and improve the predictability and flexibility of resources; perhaps raising difficulties for of aid. Several of these mechanisms are in donors that deliver a large share of aid early stages of implementation: the Interna- through debt relief. For several countries-- tional Finance Facility for Immunization such as Italy and Greece--the acceleration in (IFFIm) is being established as a pilot IFF; a FIGURE 3.3 Acceleration in ODA needed to meet commitments a. Increase in actual and projected b. Corresponding average ODA levels, 2001­10 annual growth in ODA 2004 US$ billions Percent 14 70 12.1 12 60 50 10 28 40 8 6.4 5.6 30 6 21 20 4 10 2 12 0 0 DAC countries DAC countries Increase, 2001­4 Growth rate, 2001­4 Increase needed between 2004 and 2006 Growth rate needed between 2004 and 2006 Increase needed between 2006 and 2010 Growth rate needed between 2006 and 2010 Source: OECD DAC database. Note: Prospects for ODA in 2006 and 2010 are based on DAC members' announced commitments. Not all DAC members have made commitments beyond 2006. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 77 C H A P T E R 3 pilot advance market commitment (AMC) Blending arrangements. The World Bank proposal is being developed; and an increasing has reached out to the multilateral develop- number of countries are moving forward with ment banks and development partners to airline departure tax legislation--one possible develop more specific proposals for the use of use for resulting revenues is the International blending arrangements in gap and middle- Drug Purchase Facility (IDPF) proposed by income countries as part of a larger work pro- France. These efforts will test key aspects of gram. In IDA countries, an ongoing pilot the proposed innovative mechanisms. program provides for the use of blended International Finance Facility and IFF for grants (from trust funds) and IDA credits to Immunization. The pilot IFFIm will channel achieve global or regional public goods in funds pledged by France, Italy, Norway, health projects. Spain, Sweden, and the United Kingdom through the existing governance structure Enhanced Monitoring of Donor and country programs of the Global Alliance Commitments for Vaccines and Immunization (GAVI). Work to implement the IFFIm structure is Prospects of significant additional amounts of ongoing, and a first bond issuance is expected aid raise the importance of better monitoring in mid-2006. In addition, France and the of commitments and flows. The purpose of United Kingdom plan to establish a joint monitoring will be to assess progress in working group to consider the implementa- implementing promises and to build momen- tion of a full IFF for health and education and tum for emulating best practice. Equally partly funded by the airline departure tax. importantly, monitoring can be a useful tool Advance Market Commitments for vac- to better understand the scale of resources cines. AMCs for vaccines could complement that will become available over the medium the IFFIm program to strengthen global term, and how this scaling up will translate immunization efforts. Under an AMC, into availability of resources at the country donors would guarantee a set envelope of level. By providing reliable information on funding at a given price for a new vaccine that resource availability at the country level over meets specified target requirements. G-8 the next few years, monitoring can facilitate finance ministers have agreed to consider a improvements in transparency and coordina- specific AMC pilot proposal in April. tion of aid and can help improve its pre- Airline departure taxes. The proposed air- dictability. While recognizing the challenge of line departure tax has gained steady support. providing three-year forward projections on France has passed legislation enabling collec- aid at the country level, donors have agreed tion of an airline departure levy, with rev- that the DAC undertake an effort to collect enues estimated at 200 million a year. Over such information.9,10 a dozen countries have said they will imple- Scaling up will also require better coordina- ment the tax, and others plan to follow suit. tion among aid delivery channels--bilateral The United Kingdom indicated its intention funds, multilateral funds, global funds, and to use part of the revenue from its existing Air private funds. The growth of global programs Passenger Duty to provide a long-term stream and funds and the emergence of new bilateral of finance to the IFFIm and the IFF. Many and private donors are increasing aid delivery countries have welcomed France's proposal channels. Better coordination among donors to use departure tax revenues and other con- will be essential to delivering aid effectively tributions to fund the IDPF, which would (box 3.1). For example, global funds need to provide long-term, predictable finance to pur- support country-led strategies and priorities chase drugs used to treat the big pandemics and not undermine the capacity of national affecting the poorest countries and to lower authorities for coherent planning, financing, the prices for these drugs. and service delivery. Likewise, bilateral donors 78 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E need to shift toward delegated cooperation so get set for this indicator, and only 9 percent as to make use of the comparative advantages of partner countries undertake mutual assess- of individual donors. The first step to achiev- ments of progress in implementing agreed ing better coordination will be sharing of commitments and more broadly their devel- information on planned donor activities. opment partnerships, against a target of 100 percent (figure 3.4). Delivering Aid More Effectively A distinct feature of the Paris Declaration is a mutual commitment undertaken by part- Higher aid volumes need to be matched by ner and donor countries to an international improvements in the quality of aid. Several monitoring process. To advance this process, factors influence aid quality and, hence, its the WP-EFF has created a subgroup dedi- effectiveness. Chief among them are the har- cated to work on developing technical guid- monization and alignment of aid, the modal- ance, survey instruments, and a methodology ity through which assistance is delivered, the for collecting and reporting data. This work allocation of aid, and the volatility and pre- will draw on and be supplemented with avail- dictability of aid flows. able information from the DAC peer review mechanism, the New Partnership for Africa's Development (NEPAD), Strategic Partnership Progress on Harmonization, Alignment, with Africa (SPA) surveys, and WP-EFF sub- and Managing for Results groups for public financial management and Following the Paris High Level Forum last procurement.13 year, intensive work undertaken by the Work- Progress in implementing the Paris Frame- ing Party on Aid Effectiveness (WP-EFF)11 work at the country level has been mixed. In resulted in an agreement and adoption of a few countries, such as Mozambique, Tan- global targets (for 2010) for 11 of the 12 indi- zania, Uganda, and Vietnam, governments cators in the Paris Declaration.12 The prelim- and development partners have made solid inary baseline data suggest that the gaps to be progress; this progress did not happen bridged to reach the agreed global targets are overnight but has been evolving over a num- quite large, indicating considerable scope for ber of years. Evidence of this progress can be progress. For example, only 15 percent of seen in government-led efforts to address har- donor missions are undertaken jointly with monization and alignment issues in program- other donors, well below the 40 percent tar- based approaches (table 3.2). Four factors BOX 3.1 Africa Action Plan: an opportunity to coordinate aid flows to Africa The implementation of the World Bank's Africa Action Plan will create opportunities to coordinate aid flows in Africa, ensuring that donor allocations reflect country priorities. Building on the IDA 14 base, the Bank will partner with others to increase both the volume and effectiveness of resources directed at Africa's development. One example of this enhanced coordination is the Africa Catalytic Growth Fund, which will pro- vide a new pilot mechanism to complement IDA resources while maintaining country ownership and integrated expenditure management systems supported by IDA. The UK government has pledged £ 200 million in funds. The first call for proposals under this fund was launched in March 2006. The Bank is also collaborating with other partners, including the EU, the U.K. Department for International Development, France, the African Development Bank, and the government of Japan. In meetings with the Japan Bank for International Cooperation, a number of projects in transport, power, water, and urban sector were singled out for collaboration and potential cofinancing. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 79 C H A P T E R 3 FIGURE 3.4 Indicators of progress: gaps between baselines (preliminary) and targets Selected indicators of progress from the Paris Declaration: Global baseline and target Operational development 9 75 strategies by partner countries Partner countries undertaking 9 100 mutual assessments of progress Joint country analytic work by donors 30 66 Joint donor missions 15 40 Use of common arrangements 43 66 or procedures by donors 0 20 40 60 80 100 Percent of total Baseline Target Source: OECD 2005. Note: Comprehensive baselines will be established in 2006. TABLE 3.2 Country-level progress on selected harmonization and alignment actions Country-specific efforts to Joint/ Coordinated harmonize collaborative country-level Coordinated Joint procurement Independent Harmonization assistance monitoring budget Sectorwide analytic and financial monitoring road map strategies and evaluation support approaches work management process Substantive progressa Mozambique Tanzania Uganda Vietnam Moderate progressb Bangladesh Burkina Faso Cambodia Ethiopia Ghana Nicaragua Rwanda Progress, but limitedc Cameroon Kyrgyz Rep. Malawi Senegal Zambia Source: World Bank desk surveys. a. Countries showing substantive progress (at least 4 black dots). b. Countries where there is progress but not across a broad front (at least two black dots). c. Countries where actions are being taken but progress is limited. Note: denotes substantive action; denotes moderate action; denotes little or no action. 80 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E that appear common to this group of coun- SPA survey also suggest an improving tries are strong government leadership in set- trend in recipients' perception of donor ting out priorities on development assistance, behavior (figure 3.5). The survey responses an effective implementation process for show, for the second year in a row, an poverty reduction strategy, a mature govern- increase in satisfaction overall and in all ment-donor aid relationship, and a well- the areas of donor practice. The survey functioning aid coordination mechanism responses indicate that in 2004­5, donor focused on concretely addressing difficult practices with lower scores tended to operational issues. In other countries, such as improve more. Bangladesh, Burkino Faso, Cambodia, Sectorwide approaches. Sectorwide Ethiopia, and Ghana, there has been accel- approaches (SWAPs), which initially erating moderate and concrete progress, focused on the health and education sec- while in countries such as the Kyrgyz Repub- tors, are now used in the areas of infra- lic, Malawi, and Senegal, there is progress, structure, roads, water, agriculture/rural but it is still limited and does not yet cover a development, and justice in some coun- broad front. In countries not reflected in the tries. Recent SWAPs increasingly involve table, harmonization and alignment actions multidonor pooling, use of common pro- are generally less advanced. cedures, and reliance on country systems. Over the past year countries and donors Joint analytic work. Increasingly, donors have made the most notable progress in five are undertaking analytic work jointly; for areas: example, 2005 calendar year data from the World Bank indicate that 22 percent of its Customizing Paris indicators. Examples are major economic and sector work was con- Ghana, Nicaragua, Uganda, and Vietnam. ducted with other partners (see chapter 4).15 Collaborative or joint assistance strategies. In Nigeria the assistance strategy was The encouraging developments at the undertaken jointly by DFID and the World country, regional, and global levels do not Bank. In Cambodia, the Asian Develop- provide grounds for complacency as there ment Bank, the U.K. Department for Inter- remain many obstacles to further broadening national Development (DFID), UN and deepening implementation. In donor agencies, and the World Bank collaborated countries, political factors as well as incentive on the assistance strategy. In Uganda, a structures within donor agencies are critical to strategy was developed jointly with about progress. Politicians and civil society--espe- 10 bilateral and multilateral partners. cially NGOs and private groups, who could Budget support. The 2005 budget support be affected by changes in aid modalities-- survey by the SPA found that 28 percent of might not attach the same commitment to total aid to 14 countries is being provided harmonization and alignment as senior man- as budget support, compared with 26 per- agers of aid agencies (de Renzio 2006). Thus, cent in 2004; 61 percent of these programs senior managers of donor agencies need to have made a multiyear commitment, with work with politicians and civil society to build an average of 3.1 years; and 87 percent of broad and effective support for moving for- such aid committed in 2005 was disbursed ward on the Paris framework. At the same during the fiscal year when it was sched- time, the internal incentive systems--both at uled, compared with 75 percent in previ- the institutional and individual level--need to ous years.14 Moreover, the surveyed be compatible with a sharpened focus on har- governments were of the view that memo- monization, alignment, and results (ODI randums of understanding underpinning 2004).16 Although aid agencies are making budget support operations have served to progress on improving their internal incentive reduce transaction costs. Results from the systems, more work is needed. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 81 C H A P T E R 3 FIGURE 3.5 Satisfaction improving with donor practices, 2003­5 Coordinated support to strengthen statistical system Coordinated support on public financial reforms Reporting requirements minimized and coordinated Joint missions or reviews Number of conditions minimized Conditionality coordinated Conditionalities are useful in implementing PRSs Average 1 2 3 4 5 Lowest Highest 2003 2004 2005 Source: SPA Budget Support Survey 2005. Enhancing Aid Quality: Aid Modality, To better support sustainable capacity Allocation, and Predictability development, technical cooperation needs to Improving aid modalities. The modality be aligned with the newer paradigm for (instrument) through which donors deliver aid capacity building (World Bank 2005a). This matters. Donors tend to use a range of modal- will require recipients to have more owner- ities; the choice of modality typically is influ- ship and control over TC, so that assistance enced by political and other constraints on the can be provided where it is really needed. In donor side and by partner country circum- addition, the focus of technical assistance stances. One issue that arises is whether the should be on building capacity at the level of effectiveness of aid can be enhanced within institutions, organizations, and individuals. current aid modalities. This is particularly so Mainstreaming technical assistance in pro- for technical cooperation (TC), which contin- grams and projects can also enhance its effec- ues to be a key donor tool for supporting tiveness. Finally, untying TC and providing it capacity building, although there are issues as budget support could yield savings surrounding its effectiveness.17 The DAC esti- through the competitive hiring of experts.18 mates "free-standing" TC (that is, coopera- Although bilateral food aid is a small com- tion aimed at capacity building and not ponent of total aid (about 5 percent), it con- related to investment) to be nearly $20 billion, tinues to be an important tool for providing or about a quarter of total net ODA. TC to emergency assistance and for addressing Africa was around $4.5 billion in 2004, nearly hunger and malnutrition.19 Most food aid is a fifth of total assistance to the region. tied, which raises the issue of whether untying 82 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E can lower the cost of providing assistance for recipients' policies and institutions. Results food. A recent Organisation for Economic from the selectivity model of Dollar and Levin Co-operation and Development (OECD) (2004) indicate that in 2004 over two-thirds study finds that providing direct transfers in of bilateral donors had a significant relation- kind are at least 30 percent more costly for ship between aid and poverty and that the donors than unrestricted financial assistance poverty elasticity of aid had strengthened for (OECD 2005c). Nor is tied food aid cost- most of these donors. The results for policy effective for the recipient country: transfer of elasticity of aid likewise show a strengthening food in kind was found to be about 50 percent of the relationship between aid and the qual- more costly than locally procured food and 33 ity of policies and institutions (World Bank's percent more costly than food imports from a Country Policy and Institutional Assessment); third country.20 It appears that financial assis- although some large bilateral donors are still tance or more flexible sourcing is preferable, not very selective (figure 3.6). Overall, these except where local procurement might not elasticities are much higher for multilaterals always be an option, especially in areas with than bilaterals. Donors favor other criteria in food shortages, or where well-functioning aid allocation as well, including geostrategic internal markets are lacking, and where weak considerations, vulnerability to shocks, and trade linkages could hamper imports from former colonial ties (Amprou, Guillaumont, third countries (also see box 3.2). and Guillaumont-Jeanneney 2005). Improving allocations. Although the causal Fragile states. Fragile states present a special mechanisms through which aid has an impact challenge for the donor community: Global on poverty reduction are not settled in the lit- Monitoring Report 2005 highlighted the issue erature, it would appear that to achieve the of "aid orphans" receiving much less aid and MDGs, aid should be targeted to countries "aid darlings" receiving much more aid than with poorer populations and governments can be explained by policy and poverty criteria. committed to poverty reduction. Aid alloca- A set of principles for international engage- tion patterns suggest that donors are paying ment in fragile states gained broad support more attention to poverty and to quality of among donors in 2005. These principles are FIGURE 3.6 Strengthening trend in donors' poverty and policy focus a. Policy focus b. Poverty focus Policy selectivity index Poverty selectivity index 4.0 0 3.5 ­0.2 3.0 ­0.4 2.5 2.0 ­0.6 1.5 ­0.8 1.0 ­1.0 0.5 0 ­1.2 1999 2003 2004 1999 2003 2004 Bilateral donors Multilateral donors All donors Source: Staff estimates. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 83 C H A P T E R 3 BOX 3.2 Measuring the "quality of aid" Aid "quality" refers to the form and modalities of aid that make it more effective as a resource for advancing development objectives. One approach is that of the Center for Global Development, which aims to measure aid quality of donors in its Commitment to Development Index (CDI). The CDI adjusts for "selectivity" of aid flows to poorer and better-governed countries, for tax incen- tives that encourage charitable giving, and for discounts tied to aid and small average project size (Roodman 2005). The CDI methodology is under review for improvement. From the recipients' perspective, important aspects of aid quality include fragmentation across donor programs and aid volatility. Some of these aspects are to be monitored under the Paris Declaration on Aid Effective- ness, which may contribute to strengthening the future monitoring of aid quality. now being piloted in nine countries.21 Early develop best practices, and help ensure pre- reports suggest that the principles strongly dictable financing for early recovery work.24 complement the Paris Declaration, reinforcing Improving the predictability of aid. The messages on coordination--and, by extending prospect of higher volumes and a shift from the framework to include nonaid actors such projects to general budget support could as security and diplomatic actors--the pilots increase the volatility of aid (Bulir and are helping to focus attention on some of the Hamann 2005), even as ramping up and most difficult coordination challenges in frag- maintaining scaled up service delivery call for ile states. The pilots are also helping to focus greater predictability in resource flows. A attention on some of the more complex con- recent study (Gelb and Eifert 2005) shows cepts identified in the principles, including the that although predictability poses a special operational implications of the state-building challenge for budget support, there are prac- objective. Experience from these pilots will be tical ways of addressing this issue. For exam- used to illuminate areas for further policy and ple, applying performance-based allocation operations work.22 rules with a flexible precommitment rule, Emerging experience points to the such that aid levels adjust sharply only in dynamic nature of fragile state environments, response to major performance changes, can implying that strategies should aim to look allow for precommitment of aid in a multi- ahead at the direction of reform dynamics, year framework while avoiding drawn-out avoiding an oversimplistic design of assis- periods of misallocations. In addition, donors tance based on past performance.23 Experi- could fund a country's reserve holdings--that ence has also shown that careful attention to is, a buffer reserve fund of two to four prioritization, harmonization, and results is months of imports--so that the reserves critical in fragile states, particularly in situa- could cushion a shortfall in disbursements tions of fast transition, which often suffer arising from exogenous factors unrelated to from fragmentation and a multiplicity of country performance. actors. The newly created UN Peacebuilding Commission will bring together key interna- Issues in Managing a tional actors to marshal resources and advise Scaling Up of Aid on postconflict peace-building and recovery strategies, focus attention on reconstruction With donors planning to boost aid to poor and institution-building efforts to help lay a countries, the economic impact on recipients solid foundation for sustained development, of substantially higher flows needs to be improve coordination among actors (both addressed. Some of the issues that need to be within and outside the United Nations), considered are the macroeconomic impact of 84 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E higher aid in terms of appreciation of the real Progress on Debt Relief for exchange rate and consequences for external the Poorest Countries competitiveness; management of monetary and fiscal policy; budgetary management The past year saw major progress in extending issues of higher and possibly more volatile aid and deepening debt relief to the poorest coun- flows; the implications of scaled-up aid for tries. In June 2005, the G-8 proposed that medium-term expenditure frameworks and three multilateral institutions--the AfDF, IDA, the composition of public investment; and and the IMF--cancel 100 percent of their debt identification and management of the institu- claims on countries that have reached, or will tional, organizational, and skills constraints eventually reach, the completion point under to scaling up aid (Heller 2005). Several of the HIPC Initiative, thereby freeing up addi- these issues, particularly absorptive capacity tional resources to help these countries reach constraints and the need for appropriate the MDGs. The G-8 Proposal, now called the sequencing of investment, were dealt with in Multilateral Debt Relief Initiative, will deepen detail in Global Monitoring Report 2005.25 A the debt relief provided under the HIPC Initia- discussion of macroeconomic management tive by further cutting the debt of poor coun- issues is presented in box 3.3. tries by about $50 billion (in nominal terms). At the country level, scaling up must be anchored in a strengthened Poverty Reduc- Progress on the HIPC Initiative tion Strategy process: ambitious country- owned and -led development plans linked to Overall, substantial progress has been made in medium-term expenditure frameworks and the implementation of the HIPC Initiative. As focused on results. Drawing on the PRSs, the of March 2006, 29 HIPC have reached the consultative group and roundtable processes decision point and are receiving debt relief; can be used to identify the scope of scaling these countries account for about two-thirds of up on a country-by-country basis. The DAC the initiative's total expected debt relief in net and the World Bank are collaborating to present value terms. Progress toward reaching enhance the CG-RT processes to provide a the completion point--when creditors provide practical, mutual accountability-based frame- the full amount of debt relief committed at the work for linking resources to results (OECD decision point on an irrevocable basis--con- 2006b). The Bank's Africa Action Plan, as tinued in 2005; three additional countries well as the recently approved Catalytic Fund, reached the completion point, bringing the will promote the formation of results and total number of countries to have done so to resources consultative group meetings so as 18. Most of the 11 countries in the interim sharpen the results focus of alignment and period between their decision point and com- harmonization efforts at the country level, pletion point are on track with respect to their and to improve the predictability of aid macroeconomic programs; others that experi- (World Bank 2005c). The framework for enced difficulties in program implementation enhancing the CG-RT processes would entail are pursuing the necessary policy measures to various tasks, including specifying MDG- bring their economic programs back on track based results that are to be targeted and the (IMF-World Bank 2005). actions by partner governments to achieve In addition, a list of countries meeting the these results, identifying capacity constraints enhanced HIPC Initiative's income and indebt- and the resources needed to build capacity, edness criteria at end-2004 was approved in obtaining donor commitments for pre- April 2006. The Boards of the IDA and the dictable and flexible financing consistent with IMF had decided, in September 2004, to the Paris Declaration targets, and monitoring extend the sunset clause of the HIPC Initiative progress on results and commitments of aid to end-2006 and to ring fence its application to donors and partners. countries satisfying the enhanced HIPC Initia- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 85 C H A P T E R 3 BOX 3.3 Macroeconomic management of surges in aid Meeting the MDGs would require a substantial increase in resource inflows to low-income countries, implying the need for careful attention to macroeconomic management, particularly coordination of fiscal, monetary, and exchange rate policy in response to an aid surge. Two related but distinct responses to aid increases--absorption and spending--help to analyze macro manage- ment options (IMF 2005). Absorption refers to the increase in net imports associated with an increase in aid, whereas spending refers to the widening of the fiscal deficit (net of aid) associated with that increase. To absorb and spend is the textbook response to aid; the government increases investment, and aid finances the resulting rise in net imports. Even if the government spending is on domestic goods, the aid allows the resulting higher aggregate demand and spending to increase net imports without creating a balance-of-payments problem. Some real exchange rate appreciation may be necessary to enable this reallocation of resources. In general, spending and absorbing aid is the only sensible long-run alternative to forgoing aid altogether. How- ever, other responses to incremental aid may be justified under some circumstances and for a limited period. To save incremental aid--that is, to neither absorb nor spend--may be a good way to build up international reserves from a low level or smooth volatile aid flows. To absorb, but not spend, substitutes aid for domestic financing of the government deficit. Where the initial level of domestically financed deficit spending is too high, this can help stabilize the economy. Alternatively, it can reduce the level of public debt outstanding, crowding in the private sector. To spend and not absorb is a common but prob- lematic response and usually reflects inadequate coordination of monetary and fiscal policies. This response is simi- lar to a fiscal stimulus in the absence of aid. The aid goes to reserves, so the increase in government spending must be financed by the printing of money (which generates inflationary pressures) or by government borrowing from the private sector (which crowds out private investment). There is no real resource transfer from abroad, given the absence of an increase in net imports. Dutch disease--the crowding out of exports through real exchange rate appreciation--is often seen as an unfor- tunate byproduct of aid. A permanent increase in the level of aid to a country may lead to some degree of real appre- ciation of the exchange rate. This appreciation draws domestic resources from the production of traded goods to the production of schools, hospitals, and other infrastructure deemed crucial to development. However, if aid-financed spending generates a strong supply response--for example, eases critical infrastructure bottlenecks to agriculture and manufacturing--and stimulates dynamic externalities, Dutch disease may be avoided. In both cases, aid finances the rise in net imports that comprise the counterpart to the reallocation of resources. In essence, this is the spend-and- absorb case discussed above. In the long run, therefore, aid surges may well lead to some degree of real appreciation. Recent work suggests that this may have a significant adverse impact on labor-intensive and exportable manufacturing industries (Rajan and Subramanian 2005a and 2005b). It is therefore crucial that aid-financed investments be targeted so that the result- ing gains in productivity more than outweigh any loss of export competitiveness. Moreover, the pace of aid absorp- tion and spending could be adjusted if Dutch disease concerns are important and aid-generated increases in productivity are slow to materialize. In the short run, a country's circumstances should dictate the macroeconomic responses to a surge in aid inflows: weak investment opportunities or very low international reserves could indicate that aid should be temporarily saved, but over the long term aid should be both spent and absorbed. tive income and indebtedness criteria using Debt relief under the HIPC Initiative is end-2004 debt data. The list of countries that projected to substantially lower debt and debt meet these two criteria and might wish to be service ratios for most HIPC that have considered for debt relief under the Initiative reached the decision point. Net present value includes seven countries previously identified (NPV) of debt stocks in the 29 HIPC that as HIPC plus four new countries. Three addi- reached the decision point by March 2006 tional countries that meet the required criteria are projected to decline by about two-thirds indicated that they do not wish to avail them- once they reach their respective completion selves of the Initiative. points. The ratio of debt service to exports 86 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E and fiscal revenues for these countries is esti- FIGURE 3.7 Lower debt service, higher poverty-reducing expenditures, mated to have declined from an average of 1999­2006 about 16 and 24 percent in 1998­9 to 7 and 12 percent in 2005, respectively. These ratios Percent are projected to decline further to less than 10 half of the 1998­9 average by 2006. 8 For these 29 countries, poverty-reducing expenditures on average have risen from 6 about 6 percent of GDP in 1999 to 9 percent 4 of GDP in 2005, a level more than four times 2 that spent on debt service (figure 3.7).26 In 0 absolute terms, poverty-reducing spending is 1998­9 2000 2001 2002 2003 2004 2005 2006 estimated to have increased from about $6 bil- lion in 1999 to $13 billion in 2005, and is pro- Debt service/GDP Poverty-reducing expenditure/GDP jected to increase to $15 billion in 2006.27 Creditor participation under the HIPC Initiative remains an issue, in particular with Source: IMF-World Bank 2005 and staff estimates. Note: Data for 2005 are preliminary; data for 2006 are projections. respect to non­Paris Club bilateral and commercial creditors. Although commercial creditors account for less than 4 percent of annual debt flow relief of over $1 billion over the total debt relief due under the initiative, the next decade and close to $2 billion per most have not provided their share. More- year in the following decade. over, the share of relief by non­Paris Club Key features of the MDRI. The MDRI creditors has declined, as a number of them cancels 100 percent of the debt claims of the have withdrawn their participation from the AfDF, IDA, and the IMF on countries that initiative because of restrictive legislation, have reached, or will eventually reach, the weak debt and asset management, limited completion point under the HIPC Initiative. understanding of the HIPC methodology, or Unlike the HIPC Initiative, the MDRI does lack of communication with debtors. In not propose any parallel debt relief on the addition, the number of lawsuits initiated by part of official bilateral or private creditors, commercial creditors against HIPC has or of multilateral institutions beyond the increased. Moral suasion remains the prin- AfDF, IDA, and the IMF. Although the MDRI cipal measure for encouraging participation is an initiative common to three international and discouraging litigation by remaining financial institutions, the decision to grant commercial creditors. The Debt Reduction debt relief is ultimately the separate responsi- Facility (DRF) for IDA-only countries has bility of each institution, and the approach to been an important instrument in reducing coverage and implementation varies. There are commercial debt owed by HIPC.28 three major variables when determining eligi- bility for debt relief under the MDRI. These variables include the cutoff date of eligible debt Augmenting Debt Relief: The MDRI stock, the credit coverage of the debt to be can- The MDRI deepens the debt relief provided celled, and the group of countries to be cov- by the HIPC Initiative by canceling the debts ered under the MDRI (table 3.3). of HIPC to the AfDF, IDA, and the IMF, and The MDRI implementation date is the it provides dollar-for-dollar compensation beginning of 2006 for the AfDF and the IMF for the costs of the MDRI debt relief for the and mid-2006 for IDA; the actual delivery of AfDF and IDA. Through the MDRI, these debt relief occurs only when countries have countries will receive a further reduction in been confirmed to qualify for such relief. Qual- debt of around $50 billion--an average ification for MDRI relief by HIPC that have G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 87 C H A P T E R 3 TABLE 3.3 Key features of the MDRI by institution IMF IDA AfDF Implementation date January 1, 2006 July 1, 2006 January 1, 2006 Cutoff date for debt relief End-2004 End-2003 End-2004 Country coverage All HIPC plus all non-HIPC All HIPC All HIPC in Africa with per-capita income of US$380 a year or less-- Cambodia and Tajikistan Timing of delivery of For postcompletion point For postcompletion point For postcompletion point debt relief HIPC (plus eligible non- HIPC, once they meet the HIPC, once they meet the HIPC), once they meet the qualification criteria qualification criteria qualification criteria For precompletion point For precompletion point For precompletion point HIPC, once they reach HIPC, once they reach the HIPC, once they reach the completion point, at the completion point completion point beginning of a quarter following confirmation of eligibility by the Board of Executive Directors Modality of debt relief Stock cancellation Stock cancellation and Stock cancellation and adjustment of gross adjustment of gross assistance flows by assistance flows by amount forgiven amount forgiven Source: AfDF, IMF, and World Bank staff. already reached the completion point is con- Additionality of donor financing--estab- tingent on satisfactory performance since the lishing baselines for donor contributions. The completion point in three key areas: macro- MDRI also commits to providing additional economic performance, implementation of a resources to ensure that the proposed debt for- poverty reduction strategy detailed in a giveness does not undermine the institutions' Poverty Reduction Strategy Paper (PRSP) or overall financial integrity or ability to continue a similar framework, and public expenditure to provide financial support to low-income management systems.29 HIPC that have not countries. The AfDF's estimated cost from debt reached the completion point will automati- cancellation is $9.06 billion (UA 5.84 billion) cally qualify for MDRI relief once they reach in nominal terms; the costs to IDA from the the completion point.30 MDRI are about $37 billion (SDR 24.8 billion) Twenty countries were assessed in 2005 and in nominal terms;34 and the estimated cost of 19 were found to satisfy all the criteria and full debt relief for the Fund is around $5 billion hence qualify for debt relief under the MDRI (SDR 3.5 billion) in end-2005 NPV terms, of from the IMF.31 Debt relief amounting to spe- which about SDR 1.3 billion is already being cial drawing right (SDR) 2.3 billion (about financed through the HIPC Initiative.35,36 US$3.4 billion) was delivered to these 19 coun- Actual additionality of donor financing is tries in early January 2006.32 Debt relief from required to ensure that IDA countries will IDA is expected beginning this July for 17 com- benefit from the MDRI. There will be no addi- pletion point countries.33 Debt relief from tionality if donors' replacement resources to AfDF is expected once donors finalize the cover forgone reflows of IDA and AfDF were MDRI implementation modalities for the AfDF. merely deducted from the regular financial 88 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E support of these institutions' donors. Thus, special financing items, namely, compen- IDA and AfDF have established baselines on sation for IDA's HIPC-related costs and which the additionality of donor financing can financing of forgone principal reflows due be assessed: to IDA grants. The agreed contribution baseline would be Baseline for IDA contributions indicative in nature and intended to demon- The contribution baseline has been set strate transparently the additionality of debt with reference to IDA14 regular contribu- relief financing. The level of contributions, tions and assuming an inflation rate of 2 and therefore the size of successive IDA percent per year for the SDR basket of cur- replenishments, will, as now, remain the sov- rencies, regular contributions in IDA15 ereign decision of each government in the would increase by 6.12 percent over each IDA donor community.39 The agreed base- donor's regular contribution to IDA14 in line for additionality will provide a basis for SDR terms.37 This would lead to an aggre- mutual accountability among donors, and gate contribution baseline for regular con- an important public signal of the commit- tributions of around $16.3 billion (SDR ment to avoid substitution of regular donor 10.817 billion) in IDA15 (table 3.4).38 contributions for debt relief compensation. Compensatory financing of IDA's forgone credit reflows due to the MDRI will be Baseline for AfDF contributions. To estab- additional to this contribution baseline. In lish the additionality of donor replacement addition, the financing framework of funds beyond AfDF-X, an inflation rate of 2 future replenishments will also include percent per year is assumed such that the TABLE 3.4 Indicative donor commitments to IDA and AfDF over the next decade (Baseline: constant regular donor contributions in real terms--US$ billions) IDA AfDF IDA 14 IDA 15 IDA 16 AfDF-X AfDF-XI AfDF-XII (FY06­08) (FY09­11) (FY12­14) (CY05­07) (CY08­10) (CY11­13) Regular donor contributions In current replenishment (net of supplemental, incentive, accelerated funds) 14.9 3.59 In future replenishments (constant in real terms)a 16.3 17.8 3.81 4.04 Special financing commitments of donors 2.6 4.4 5.6 of which: Financing of MDRI costsb 0.8 1.9 2.9 0.12 0.31 0.52 Total indicative financing commitments of donors 17.5 20.7 23.4 3.71 4.12 4.57 Source: AfDF and IDA staff estimates. a. For IDA, based on regular donor contributions in IDA14, at the IDA14 foreign exchange reference rates, using a 3% per year USD deflator (equiv- alent to a 2% per year deflator in SDR terms). For AfDF, based on regular donor contributions in AfDF-X, at the AfDF-X foreign exchange reference rates, using a 3% per year USD deflator (equivalent to a 2% per year deflator in UA=SDR terms). b. For IDA, based on disbursed and outstanding credits; cut-off date of 12/31/2003 and implementation date of 07/01/2006; includes 38 HIPC and 4 countries potentially eligible under the HIPC Sunset Clause. For AfDF, based on disbursed and outstanding credits at end-December 2004 as cut-off date, and implementation date of 01/01/2006; includes 32 HIPC and one country potentially eligible under the HIPC Sunset Clause. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 89 C H A P T E R 3 aggregate nominal donor contributions of at least intact for all beneficiary countries. UA 2.454 billion in AfDF-X would increase Therefore, in terms of net resource transfers, no at the compound rate of 6.12 percent to UA MDRI-recipient country would be expected to 2.604 billion in AfDF-XI.40 be worse off following debt relief. However, Impact on IDA/AfDF assistance. The new IDA commitments may decline over time MDRI will affect gross assistance flows from for some countries receiving debt relief, IDA and AfDF through a two-step process. depending on the difference between future First, 100 percent stock cancellation will be annual performance-based allocations they delivered by relieving eligible countries of receive from IDA and forgone debt service at repayment obligations and by adjusting their each period. Longer-term projections of future gross assistance flows by an equivalent performance-based allocations are, however, amount. This feature helps allay moral haz- subject to a considerable degree of uncertainty. ard and equity concerns associated with debt A country's allocation in any given year will cancellation. Second, additional resources depend on a number of factors, including its provided to these institutions by the donors performance relative to other countries; (to compensate for the forgone debt service whether it is eligible for IDA grants and, con- from the country) will be reallocated to IDA- sequently, subject to a volume discount under only and AfDF-only countries through the IDA's grant allocation system; the size of IDA's existing performance-based allocation sys- overall available resource envelope; and the tems of IDA and AfDF. This feature helps extent of country graduations from IDA and strengthen the link between resource trans- reverse graduations back into IDA. Many alter- fers and country performance levels. native scenarios could therefore be devised, As a result of debt relief, total IDA assistance leading to diverse outcomes. flows--the sum of new IDA commitments and The challenge for countries receiving debt forgone reflows--would be expected to remain relief is to ensure that financial resources freed up by debt reduction are used for reach- ing the MDGs. Here, sound public financial FIGURE 3.8 Impact of MDRI on debt ratios in HIPC management is key to achieving results; chap- ter 6 discusses the quality of public financial NPV of debt management in HIPC and suggests ways of to exports, percent improving performance. It is also critical that 160 debt reduction does not undermine recipient 140 countries' capacity to mobilize domestic resources for development. 120 Lower debt burdens and debt sustainability. 100 The MDRI will significantly reduce debt bur- den indicators in HIPC. Debt cancellation, 80 once implemented, would cause debt ratios in 60 HIPC to be significantly lower than those for grant-eligible non-HIPC. For the 18 postcom- 40 pletion point HIPC, about 80 percent of the 20 debt outstanding after HIPC relief is owed to 0 multilateral creditors; in these countries the 18 completion-point African Latin American average NPV debt/exports ratio would fall countries completion-point completion-point from over approximately 140 percent after countries countries HIPC relief to a projected 59 percent after After HIPC relief After MDRI implementation of the initiative (figure 3.8). This would put debt ratios in these countries at Source: Staff estimates. less than half the average in non-HIPC that are 90 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 6 D E L I V E R I N G O N C O M M I T M E N T S F O R A I D , D E B T R E L I E F , A N D T R A D E currently eligible for grant assistance from IDA tion point HIPC, the average debt/exports due to elevated debt ratios. ratio would be about 45 percent, whereas The MDRI would leave African and Latin among the LAC completion point HIPC it American and Caribbean (LAC) HIPC with would be 92 percent. This is largely due to the different debt ratios. Among African comple- fact that LAC HIPC would receive debt relief BOX 3.4 The MDRI and "free-riding" risks The MDRI provides for post-HIPC irrevocable debt stock cancellation and hence will significantly lower debt stock burdens for the debt relief recipient countries. This relief comes on top of HIPC debt relief already committed. After this debt relief, the debt stock ratios in most of the recipient countries will be significantly below that of many mid- dle-income countries, which primarily borrow on nonconcessional terms. As a result there is an increased risk of "free-riding"--situations in which nonconcessional lenders may indirectly obtain financial gain from debt forgive- ness, grants, and concessional financing activities of IFIs.a This situation could lead to an excessive buildup of debt if nonconcessional borrowing is not carefully managed. The figure below displays the new debt burden indicators for the 18 completion point HIPC after MDRI. Post-MDRI debt relief: HIPC versus selected lower-middle-income countries Post-MDRI debt relief: 18 completion-point HIPCs versus selected lower-middle-income countries NPV of debt to exports 300 Peru 250 Syria Ecuador 200 Brazil Jordan 150 Bolivia Nicaragua Philippines 100 Guatemala Mauritania Honduras Guyana 50 Thailand China 0 0 10 20 30 40 50 60 70 80 90 100 NPV of debt to GDP 18 completion-point HIPCs Lower-middle-income countries Source: Global Development Finance database and staff estimates. Note: Debt data are public and publicly guaranteed debt and IMF credits at end-2003. The debt burden indicators for middle-income countries would be even higher than those for HIPC if the indicators were based on total external debt, because private debt is much larger in middl