From Adjustment Lending to Development Policy Lending: An Evolution

From Adjustment Lending to Development Policy Lending: An Evolution

Adjustment lending has been one of the World Bank’s more controversial activities since it was started in the 1980s to help countries reform their economies and boost growth. But it has evolved over the past two decades from a narrowly proscribed list of policies to a broader, longer-term range of structural issues. Stefan Koeberle, Advisor in the World Bank’s Operations Policy and Country Services Vice Presidency, discusses the evolution of adjustment lending, to the new Development Policy Lending.

Q: How has adjustment lending evolved over the past 20 years?

A: Adjustment lending was originally a device to provide short-term balance of payments support for countries adjusting to economic shocks. It was to help them avoid the import compression usually entailed by these shocks. Countries were given financing in return for addressing economic distortions. Today the instrument has evolved into something quite different. Now countries have an overall development financing need and a medium-term agenda for policy measures, institutional changes and public expenditure allocations. Today what is still called adjustment lending is much more of a medium-term institutional instrument that supports step-by-step reforms.

Q: Why are standards set (called conditionality) that countries must meet in order to receive adjustment loans?

A: There is always a need for us to exercise due diligence that ensures the resources put at our disposal, often by taxpayers through the International Development Association, or through the capital market, are being put to good use. We have to ensure that countries are indeed moving in the right direction. 

Q: So how has conditionality evolved?

A: Our conditionality now focuses more on performance and what it means in practice and less on promises. The bulk of adjustment lending is now done in the form of programmatic lending. In this case a series of operations support a medium-term program and in an individual operation, you disburse against things that have taken place rather than on promises of what will happen. You spell out what is the understanding between the Bank and the borrower about the types of key measures that are necessary to move them toward their goal. A year or so later the Bank can provide a second operation once it has essentially made an assessment that adequate progress has been made even if the individual measures are not exactly what was decided a year ago. In that sense conditionality has evolved as a mutual commitment device. The donors are very clear about what they expect and the country is very clear about what it can deliver. But there is flexibility.

Q: Why has adjustment lending been so controversial?

A: Partially, I think it stems from the experience in the 1980s where several important lessons still had to be learned. In retrospect, one issue was that adjustment lending was sometimes given to countries that really had no intention of adjusting. A typical example of this would be Zaire where broader considerations, like the Cold War, were taken into account. Another lesson that was learned painfully during the 1980s is that greater consideration has to be given to political and institutional factors and most importantly to the country’s own capacity for implementing complex, difficult institutional changes. Many of these reforms are inherently political and require tradeoffs between different groups. And the Bank in the early days tended to focus on the economic rationale behind the reforms, wasn’t always fully aware of all the political dimensions when it supported an enlightened champion in the government who may not have had broad support within the country. Related to this is a third issue. In the beginning, the social dimensions of poverty were probably not as emphasized as they should have been. And there was, in line with the development thinking in the early 80s, an over-optimism of the speed in which resources could be allocated and short-term pain could be endured.

Q: It is frequently said that adjustment lending operations drive people into poverty, that they make poor people poorer. Is that true?

A: I think very often something gets mixed up. There’s the economic crisis that hits a country and then an economic program that the country undertakes to correct it. Then there is a stabilization program that is supported by the International Monetary Fund and then there may be the economic program of structural and intitutional reforms that is supported by the World Bank. Those are four different things and people typically mix them up.  Ultimately what causes pain and suffering is the economic crisis that the country is in.

Countries have dealt with this in different ways. leveling this regard, if the country at the time of a crisis has no access to foreign financing, the need for belt-tightening would be much larger. At the most fundamental level, having access to international financing through the World Bank or the IMF helps to alleviate the crisis to some extent.

Now there have been times in the past, when economies were particularly distorted, with a heavily protected internal market that was essentially no longer affordable, a country heavily in deficit, with an unsustainable debt pattern, when some adjustment had to be made because the country simply could no longer afford to pursue its economic policies. In that case a country had no choice but to reduce its fiscal expenditures which often meant it had to reduce subsidies, it had to close down unsustainable state enterprises. It had to open up markets to create the conditions for exports, it had to reduce import tariffs, and thereby reduce the shelter for sheltered industries. The result of this was sometimes painful.

Q: Does adjustment lending take into account the effects of reforms on poor people?

A: All adjustment operations should be about development and about poverty reduction. So all the measures in one way or another should be beneficial to poor people because that is what the World Bank is ultimately about. Now in the process of undertaking these reforms there might be measures that adversely affect some people. Then it’s important for us to analyze that properly and make sure these people are accommodated.