© The World Bank

Growth is an essential and powerful instrument for reducing poverty and improving living standards. If developing countries are to meet the MDGs, economic growth in these countries must accelerate.

Strong growth requires an economic climate that is conducive to investment, job creation, and higher productivity. To foster a climate for equitable growth, the Bank conducts economic analysis and provides country lending and policy advisory assistance for a variety of programs (see “Sharing Knowledge” in “Summary of Fiscal Year Activities”). These programs aim to help maintain economic and financial stability, improve investment climates and enable private sector development, facilitate better governance and effective efforts to combat corruption, develop and maintain infrastructure, support environmental sustainability, and promote openness to trade and access to world markets for goods.

IMPROVINGTHE INVESTMENT CLIMATE AND ENABLING PRIVATE SECTOR DEVELOPMENT

The Bank's analytic work on investment climates provides countries with valuable information and tools. Now in its second year, the Doing Business project, which is supporting reform work in more than 30 countries, provides objective, quantifiable indicators of business regulation in 145 countries. It provides tools for benchmarking that enable governments to compare their investment climates to those of their neighbors and their performance to global best practices. This year's report, Doing Business in 2005, expands the indicators of business constraints to include property registration and investor protection. The report also helps identify reform priorities.

The new Investment Climate Surveys Database , with data from 30,000 firms in 58 countries, offers additional indicators to inform governments contemplating reforms. This year the Bank and IFC completed an analysis of corporate governance in 10 countries, bringing the number of analyses to 48. Drawing on this research, the Bank's World Development Report 2005: A Better Investment Climate for Everyone has elevated the importance of improving the investment climate within the development agenda.

The Bank Group's advisory services and lending are turning diagnostic work into action in many countries. Commitments for 109 new projects with private sector development components in fiscal 2005 amount to more than $3.8 billion. With 23 country investment climate assessments completed this year, country assessments are now being used to guide reforms or support Bank projects in over 40 countries. For example, in El Salvador the investment climate assessment helped shape the Bank's Growth Development Policy Loan by identifying challenges in the investment climate and infrastructure. In Cambodia the Bank-IFC Foreign Investment Advisory Service is working with the garment industry to create a socially responsible brand image that will help it compete globally.

FACILITATING GOOD GOVERNANCE AND COMBATING CORRUPTION

Research shows that open and transparent governments are more likely to generate economic growth. For this reason, the Bank now requires all Country Assistance Strategies to address governance (see “World Bank Lending” in “Summary of Fiscal Year Activities”).

In fiscal 2005 Bank lending for governance totaled $2.6 billion, 12 percent of new lending (see “World Bank Lending” in “Summary of Fiscal Year Activities”). This lending supports reforms in public financial management, procurement, service delivery, tax policy, customs administration, and law and justice. (See www1.worldbank.org/publicsector/index.cfm.)

Integrity of Financial Systems   The Bank's program to fight money laundering and the financing of terrorism focuses on helping countries strengthen the integrity of their financial systems. The Bank works with the intergovernmental Financial Action Task Force, similar regional bodies, and the United Nations to promote policies that encourage transparency in financial sectors and help detect and prosecute corruption. In fiscal 2005 the Bank more than doubled its assistance in this area, providing training programs and long-term expert mentors for regulators, organizing global dialogues with the public and private sectors, conducting assessments of country compliance with international best practices, and publishing reference guides and practical manuals.

Capacity Building and Diagnostics   The World Bank Institute (WBI) helps policy makers from client countries develop the knowledge, skills, and abilities that will enable them to improve governance and stem corruption. In cooperation with the Bank's lending program and partner institutions, the Institute delivers participatory learning programs that help local government leaders formulate specific institutional reforms. In fiscal 2005 WBI helped civil society organizations from Benin, Guatemala, Guinea, Sierra Leone, and Zambia to develop governance and anticorruption assessments.

WBI and the Bank's Development Economics Group produce the Worldwide Governance Indicators, which assess more than 200 countries and territories on key dimensions of governance. These indicators are widely used by policy makers, donor agencies, and social science researchers. (See “Capacity Development” in “Summary of Fiscal Year Activities.”) (See www.worldbank.org/wbi/governance.)

Law and Justice   Courts and other justice institutions are vital to good governance and the fight against corruption, as they enforce the rules governing economic and social interaction. Since 1991 the Bank has funded more than 1,500 law and justice activities in 140 countries. These include 17 freestanding justice projects that were active in fiscal 2005.

Institutional Integrity   The Bank is a leader among international institutions in resources committed to fighting fraud and corruption in its own operations and in client countries. The Department of Institutional Integrity was created in 2001 to investigate allegations of fraud and corruption within the Bank and in Bank-funded projects. The Bank issued its first Annual Report on Investigations and Sanctions of Staff Misconduct and Fraud and Corruption in Bank-Financed Projects in February 2005. The report provides detailed data for fiscal 2004 and summary data for fiscal 1999–2004. Since 1999 the department has investigated and closed more than 2,000 cases. As of the end of fiscal 2005, these investigations had led to the debarment of more than 300 firms and individuals. The Bank publishes all of its debarments at www.worldbank.org/procurement. Allegations can be received at the Bank's 24-hour hotline (1-800-831-0463), by e-mail ( investigations_hotline@worldbank.org), and through Bank staff and other sources.

REVITALIZING INFRASTRUCTURE

The World Bank supports activities in a wide array of infrastructure services, including energy, transport, water supply and sanitation, urban services, telecommunications, oil, gas, and mining. It helps clients improve infrastructure service delivery through policy dialogue and institution building, support for reform, and physical investment. It also acts as a catalyst for leveraging financial and other assistance from development partners and the private sector.

Significant progress was made in fiscal 2005 toward implementing the Infrastructure Action Plan, which commits the Bank to enhancing its support by providing country analytic work in response to client demand for infrastructure strengthening, and by refining its lending instruments and advisory approaches. Infrastructure lending grew from $5.4 billion in fiscal 2003 to $6.5 billion—about a third of total lending commitments—in fiscal 2004, to $7.3 billion in fiscal 2005—remaining at a third of total lending.

The Board approved 77 infrastructure projects in fiscal 2005, a 7 percent increase over the number of commitments in fiscal 2004. Transportation projects received the largest share of commitments, at almost 43 percent, followed by energy and mining, water supply and sanitation, and information and communication technologies.

The Bank delivered 188 regionally managed economic and sector work or analytic infrastructure products in fiscal 2005. Significant changes have been made in the way this work is done, with greater emphasis on the linkages between infrastructure and other sectors. Examples include work in Colombia and Indonesia as well as a flagship infrastructure study on East Asia carried out jointly with the Asian Development Bank and the Japan Bank for International Cooperation. Similar analytic work is envisaged for Africa, Europe and Central Asia, and Latin America and the Caribbean.

The Bank is making substantial investments in new areas. Together with IFC, it is exploring opportunities for engaging with clients more effectively at the subnational level through the Municipal Fund Joint Pilot Program. It is also partnering with the International Monetary Fund (IMF) to find ways to address the lack of adequate fiscal resources for infrastructure investment once ongoing expenditure commitments in country budgets are met. The Bank and IFC are offering guidance to staff and clients on the role of the private and public sectors in providing infrastructure services and are fine-tuning approaches to public-private partnerships. The Bank is also continuing to pilot output-based aid approaches, in which governments delegate service delivery to third parties under contracts that tie disbursement of public funding to the outputs and services actually delivered to target groups.

The Bank remains committed to having a significant impact in client countries by scaling up infrastructure activities and will continue to engage other development partners, including the private sector, in this work.

TACKLING RISKS AND UNCERTAINTIES AFFECTING DEVELOPING COUNTRIES

Poor countries face risks and vulnerabilities that stand in the way of sustainable development. Water insecurity, commodity price volatility, extreme weather variability, and natural disasters affect growth prospects. Ecological risks—caused by climate change, biodiversity loss, depletion of fisheries stock, and unsustainable practices such as illegal logging—threaten the availability of natural resources for productive purposes and wealth creation. Social imbalances, weak institutions, and political instability lead to conflicts, which deter development efforts.

The Bank is addressing these issues with a suite of interrelated sector strategies on agriculture and rural development, forests, water resources, the environment, and social development. This set of strategies takes an integrated approach to growth based on social and environmental responsibility. It also focuses resources on conflict-affected countries.

Agriculture and Rural Development   Seventy percent of the world's poor live in rural areas. The Bank's renewed focus on rural development is therefore timely, and is reflected in Bank lending of $2.8 billion in fiscal 2005.

Social Development   During fiscal 2005 the Bank's Board of Executive Directors discussed “Empowering People by Transforming Institutions: A Social Development Implementation Plan for the World Bank.” This action plan focuses on the core values of inclusion, cohesion, and social accountability. (See “Sector Strategies” in “Summary of Fiscal Year Activities”.)

Environment  Investment in environmental and natural resource management projects was $2.5 billion in fiscal 2005, representing 11 percent of Bank lending. This year's Global Development Marketplace also focused on finding solutions for a sustainable environment. (See “2005 Global Development Marketplace.”)

Multidisciplinary Approaches   To take full advantage of synergies on cross-sectoral issues, the Bank has formed natural resource management teams to ensure that land, fisheries, biodiversity, and forests projects are managed collaboratively. Implementation of the Water Resources Strategy, work on agricultural commodities and international trade, and work with TerrAfrica, a regional partnership that promotes sustainable land management in Africa, also involve such collaboration.

Global Partnerships   The Bank advances its sustainable development agenda through key global partnerships, including partnerships with the Global Environment Facility and the Consultative Group on International Agricultural Research. The World Bank–World Wildlife Fund Alliance for Forest Conservation and Sustainable Use renewed its commitment to slowing the depletion of the world's forests by committing to phase two of the partnership, which sets new targets for reducing forest depletion. The Global Program on Fish will seek to improve sustainable livelihoods in the fisheries sector and in rural coastal communities in response to the current crisis in capture fisheries. Public-private partnerships for carbon finance surpassed $800 million, representing a major effort to generate a stable global market for carbon emissions trading. Through the Critical Ecosystem Partnership Fund, the Bank, together with Conservation International, the Global Environment Facility, the government of Japan, and the John D. and Catherine T. MacArthur Foundation, is conserving the Earth's biodiversity hotspots. It is supporting the work of the Com+ Alliance of Communicators for Sustainable Development, a global communications platform aimed at bringing sustainable development closer to the people. (See http://www.cgiar.org/, http://www.thegef.org/, http://www.worldbank.org/, and http://www.complusalliance.org/.)

Conflict-Affected Countries and Fragile States   More than one-third of the Bank's borrowers are affected by conflict. Poor countries suffer disproportionately from civil war: a country whose annual per capita gross domestic product (GDP) is $250 has an average 15 percent risk of civil war in the next five years, whereas a country whose per capita GDP is $5,000 has less than a 1 percent risk. A typical civil war lasts seven years and causes an estimated 30 percent increase in poverty and a 13 percent increase in infant mortality.

The Bank increasingly uses tools related to conflict sensitivity in its operational work, with 15 countries using conflict analysis frameworks and completing postconflict needs assessments and recovery plans. IDA had committed more than $3 billion in exceptional postconflict assistance by fiscal 2005. Since 1998 the Post-Conflict Fund has also approved $71.2 million for 142 grants in 38 countries and territories. Most of these grants are implemented by civil society organizations and United Nations agencies. Forty-two percent of all such funds have gone to Africa. The poorest conflict-affected countries are also supported through the Low-Income Countries under Stress Initiative. (See “Low-Income Countries under Stress” in “Summary of Fiscal Year Activities” and www.worldbank.org/licus.)

RESPONDING TO DISASTERS

The tsunami in the Indian Ocean on December 26, 2004, had a devastating—and disproportionate—effect on poor people. The Bank responded quickly, assisting with recovery planning, helping coordinate rehabilitation and recovery support requested by national authorities, and mobilizing financial support.

Within days the Bank had teams in India, Indonesia, the Maldives, and Sri Lanka, the four most severely affected countries. Staff in Bank country offices worked side by side with government counterparts and other partners, notably the Asian Development Bank, to assess the extent of the damage and loss and to develop recovery strategies. In the Maldives the Bank quickly established a country presence. In the Seychelles and Somalia, where the Bank does not have active programs, Bank staff in the region provided assistance to the lead support agencies and identified financing options outside the Bank. Three principles guided Bank support for tsunami recovery: government leadership of the recovery efforts, community involvement in assessing needs and designing recovery programs to ensure that they will benefit poor people, and efficient coordination among members of the donor community. (See www.worldbank.org/tsunami.)

Disaster reduction is at the core of the Bank's mission of fighting poverty. Since its establishment, the Bank has been a leader in providing postdisaster reconstruction assistance. Its expertise in recovery and reconstruction and its efforts to promote more effective disaster risk management allowed it to respond to the tsunami in a strategic and comprehensive way.

Since 1998 the Bank has provided training and technical assistance on integrating disaster risk reduction into development programs. Bank staff and representatives of client countries are trained in disaster-related topics, drawing on case studies to promote sustainable recovery processes and reduce the vulnerability of communities to future disasters. (See www.worldbank.org/hazards.)

There is a growing recognition that disaster-prone countries need to develop a more proactive approach to disaster risk management. That was highlighted in this year's Bank publication, Natural Disaster Hotspots. The approach includes reducing risk before disasters hit and strengthening preparedness and response capacities to enable full and effective utilization of resources after a catastrophe. In most cases, humanitarian aid and reconstruction assistance are not sufficient for full recovery from disaster events. Often, absorptive capacity is very weak, and only a fraction of committed funds are disbursed, even years after the disaster.

To address these problems, the Bank has been promoting a comprehensive risk management framework. This framework includes developing a better understanding of the risks facing a country and the scale of potential losses, taking steps to mitigate the potential effects of disasters, and examining the potential to use existing lending products more creatively to support ex ante recovery financing mechanisms.

FOSTERING INTERNATIONAL TRADE

The Bank seeks to promote a world trading system that is more conducive to economic development, and to help developing countries capture the benefits of global trade. In fiscal 2005 it advocated for World Trade Organization members to achieve as ambitious an outcome as possible in the current Doha Round of trade negotiations. It emphasized the importance of a successful round of talks to the health of the world economy and the fight against poverty.

The Bank works at both the multilateral and country levels to support clients in their trade integration strategies and to help them manage the transition to the environment that would emerge from a successful Doha Round. This work focuses on three areas: supporting investment and technical assistance projects to help countries identify the gains from trade facilitation reforms; making resources available to support trade policy reforms; and generating the analysis needed to anticipate, measure, and ameliorate the special adjustment costs countries could face as a result of multilateral trade liberalization.

In fiscal 2005 the Bank approved 15 new projects with trade facilitation components, for a total of $381 million. These projects focus on infrastructure, services, financial systems, and other sectors of the economy essential to advancing trade and development. The Bank also helped several countries prepare for accession to the World Trade Organization. The World Bank Institute promoted 60 trade-related learning events.

The Bank published several important reports on trade in fiscal 2005. Global Economic Prospects 2005: Trade, Regionalism, and Development concludes that regional trade agreements can improve prospects for rapid poverty reduction, but only if developing countries liberalize trade unilaterally, multilaterally, and regionally. Other key trade research publications include Global Agricultural Trade and Developing Countries and the Customs Modernization Handbook . In the past two years, the Bank has launched studies on how to improve trade policies and develop trade opportunities in more than 50 countries as well as some 15 regional studies. (See www.worldbank.org/trade.)

2005 GLOBAL DEVELOPMENT MARKETPLACE