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Why Development Policy Lending’s Time Has Come

Available in: العربية, русский, 中文, Français
James W. Adams, World Bank vice president and head of the Operations Policy and Country Services Network, talks about how Development Policy Lending will help improve development outcomes.


Q: What is the difference between adjustment lending and the new development policy lending? Is it just a name change?


A: No, it reflects the evolution of what we’ve been doing. We’re moving away from a very prescriptive list of policies that were part of the early adjustment lending--focusing largely on fiscal constraints, on trade policy reforms, pricing reforms--to a much broader range of issues.


Many of these issues involve longer-term structural change. They involve issues like strengthening the education and health sectors, improving the governance environment, the agricultural sector framework. So what we are seeing is a much broader and longer-term focus of this work.



Q: Why has the Bank decided to make the change?


A: There are several things that underlie this. One, we do want to make the point that the instrument has evolved and the composition of this lending is very different from the early operations. 


Second, the update is part of a broader effort to distinguish more sharply between mandatory policies and recommended good practices.


I think another piece of the puzzle is also important – that is to reflect the evolving roles of the Bank and the International Monetary Fund over the last few years. The Fund has lead responsibility for the macro-environment – balance of payments issues, exchange rate issues -- while the Bank has responsibility for the structural issues and various reform issues such as governance and sectoral reform.


Q: Will development policy lending still be able to help countries hit by economic crises?


A: Yes. There will still be cases of crisis and the new instrument will be broad enough to deal with those. But we do expect the large majority of the lending on the development policy side to focus on longer-term structural issues.


Q: Structural adjustment has been a very controversial topic over the years. Have there been things that the Bank has learned in the past that are reflected in this new policy?


A: There have been major changes in thinking due to the Bank’s structural adjustment work. On some issues there is far broader agreement today. For example, there is a much more consistent recognition that fiscal discipline is important. Most African countries have moved to market exchange rates—a big change from the 1970s and earlier. Most governments recognize now that the state-led approach to development has problems and issues and are much more concerned about the size of the state. So I think a lot has changed and has been accomplished.


At the same time, it is true there were some problems with our initial approach to adjustment. For example, the assumption that adjustment could be achieved more quickly than in fact proved possible. We often had the time frame wrong for our adjustment processes. And, secondly, we need to underline the need for the government to take leadership on these issues.


I think there was a tendency in the earlier times of adjustments to feel that one could “purchase” reform through large operations. I think we now recognize that ownership of the reform and government leadership of the reforms is absolutely essential for sustainability.


Q: With your experience in Africa, as country director in Uganda and Tanzania, did the governments have control over the reforms?


A: It was very different in the two countries. When I started in 1995, Uganda had a strong reform record with strong government leadership of the reform program. So the ownership was clear and forceful from the beginning. In Tanzania, however, the reform program had gotten off track. It was with the election of President Mkapa in late 1995 that the government essentially took a step back and saw that it had some work to do on building its ownership for reform. It did, in fact, spend a lot of time working on that ownership issue. During that period we worked very closely with the government but we didn’t return to fast disbursing adjustment lending for a year largely because we wanted to see that ownership being confirmed. Tanzania has sustained a pretty good reform program since Mkapa took over in late 1995.


Q. What approach did the Bank take moving forward with the Tanzanian government?


A. The Bank focused on ensuring that programs were closely aligned to Tanzania’s priorities. We supported the Tanzania revenue authority, which the government set up to address the fiscal problem, we moved on privatization of the state-owned commercial banks and we supported government efforts to improve budget discipline and resource allocation. We worked very closely with the government team and the IMF in the design of the reform program. But I think we always made sure that we respected the government’s leadership role in that. And finally we worked very closely on HIPC (debt relief). I think the government felt moving forward with HIPC validated the results from their policy changes as the HIPC funds largely supported education and health programs that the government had endorsed and pushed.



Q: One of the things that is no longer in the new policy is the more prescriptive approach toward adjustment operations. How big a step is that?


A: That’s a step we’ve had broad support for. I think everybody recognizes the themes of the Washington consensus, which were reflected more consistently in the earlier policy, remain important themes of economic policy. I think, however, the Bank got too prescriptive and, in fact, was presenting a one-size fits all to governments. In moving away from that we are emphasizing our desire to see the governments develop policies. This broader approach will form the basis for Bank support.




Q: Does the new policy recognize that sustainable reform takes time?


A: This is where we are moving toward what we’ve called programmatic lending, recognizing that you are going to do it over a series of operations. I think that change has been important.

Secondly, I think once you move to structural issues, there is a recognition that these are not like some of the first-generation reforms. You can change an exchange rate simply by signing a declaration, but you can’t improve an education sector simply by making an announcement. So I think the content of the changes also reflect the fact that they are going to take longer to bring about.


Q: Does the new policy take into account environmental safeguards and the effect of changes on people living in poverty?


A: The big change in this regard has been a focus on ensuring broader participation in government policy making. In the new policy there is a much clearer statement about the desire to see governments working with civil society and other actors in the development front in putting together policies.


Also, unlike the original policy in which there was little mention of environment or social issues, there is now a reference to the importance of vetting what we are doing to ensure that environmental or social effects are properly reviewed. This will draw on analytic underpinnings at the country or sectoral level, because unlike a traditional investment project where you can actually monitor the physical activities you are doing, in development policy lending (adjustment lending) you are basically supporting the provision of funds to a budget so there isn’t that same link. So the emphasis is really looking at the country’s institutional and policy arrangements, the impact on country policies in these areas, rather than focus on the specific impact of the Bank lending.

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