Spring Meetings 2005 Dialogues

Friday, April 15, 2005
10:30 am – 12:30 pm, room MC8-W150

MEETING NOTES [1]

Alex Wilks of Eurodad chaired this meeting and speakers included Jean Merckaert from (CCFD), Brian Ngo, of the World Bank, and Nancy Alexander of the New Rules for Global Finance Coalition.                                

Mr. Merckaert started the discussion off with a presentation on the Country Policy and Institutional Assessment framework (CPIA) and the new Debt Sustainability Analysis (DSA) of the Bank and the IMF. In opening he talked about the Heavily Indebted Poor Countries (HIPC) initiative which was meant to bring countries from an unsustainable debt situation to a sustainable debt situation. The HIPC analysis has been the subject of a great deal of criticism from non-governmental organizations (NGOs), he said, and basically there are three main criticisms: The first one is its “limited and narrow” criteria based on exports. Second is the primacy of debt and debt repayment. On this he said, NGOS have been arguing for an alternative debt sustainability analysis based on the idea that the fulfillment of human development needs should come first and then the service of debt. The third criticism is that analysis is being done by the creditors; the Bank and the IMF are playing the role of judge and jury in this debt sustainability question. The Bank and the IMF are themselves evaluating how much relief of debt they should provide and this criticism is made stronger by the fact that there have been a lot of overly optimistic assumptions, for example, around world trade.

The new DSA presents some positive changes, Mr. Merckaert said. For one thing it moves from the one-size-fits-all approach of the HIPC initiative with the single thresholds toward a more case-by-case analysis adapted to each country’s situation and taking into account in particular vulnerability to exogenous shocks. It also takes more into consideration revenues as a criteria as opposed to exports. Another positive is that lending institutions are trying themselves to develop a framework that prevents the over lending that has happened in the past.

However NGOs have concerns as well. First, the DSA presumes no further debt relief. In its effort to take a forward looking approach, rather than a backward looking approach, it tends to ignore the huge impact current debt stock has on the country’s capacity to access credit and repay in the future, so more debt relief may be necessary. A second concern is that the framework doesn’t give enough consideration to the MDGs. Another point is that also although case-by-case analysis is very welcome, judgment becomes more important; it gives more importance to the analysts themselves. Here the discretionary dimension is key, and there seems to be a conflict of interest between the Bank as an analyst and as a lending institution.

Then on the CPIA Mr. Merckaert had three main points: One was that it is a one-size-fits all set of 16 indicators, and this approach seems to contradict the intention of having a very country-by-country approach. The second point is that the assumption that aid works better in good performers has actually be questioned by quite a few analysts. The third and, he said, major point was that how the CPIA works makes a kind of conditionality toward a country from the lending institutions.

To conclude, Mr. Merckaert had two questions; he wanted to know the perspectives of participants, especially the representatives from the Bank on the new DSA framework. The second question was: is the integration of the CPIA and the DSA framework a way to reinforce conditionalities? And he pointed out the contradiction between this and the Poverty Reduction Strategy Paper (PRSP) approach where countries are supposed make there own policies.

Mr. Wilks then introduced the next speaker Brian Ngo, who has been involved with the CPIA and whom Mr. Wilks said was going to provide official input form his position as lead economist for  Europe for the Bank.

To begin with Mr. Ngo said that what he was going to do was to give a picture of how the Bank sees the CPIA. Giving some background, he said that the CPIA was begun in the Bank in the 1970s and has been used mainly for resource allocation among countries. It is basically a way of assessing the quality of country’s policies and institutional frameworks and looking forward to growth and poverty reduction. The now 16 indicators are grouped into four clusters, economic management, structural policies, policies for social inclusion and equity and public sector managements and institutions. Ratings are on a 1-6 scale. It is based on the analytical work that is done in the Bank as well as information coming from other sources that complements the Bank’s information. It really focuses on policies and institutions, it is not focusing on outcomes. There are many things, he acknowledged that influence the outcomes that are not under the governments control, but there are some things that are, and those are what are considered. Secondly it is based on actual not planned policies. And finally, this is a small snapshot of country policies and institutions at a particular point in time.

Along with resource allocation, the CPIA is used particularly in developing the Country Assistance Strategies (CASs). Country teams that draft the CASs look at the CPIA in order to see where the weaknesses are, and it does give an advantage in dialoguing and helping the country to move forward. Mr. Merckaert he said, made that into a conditionality, but through a policy dialogue it is really trying to do something to improve areas of weakness. Also it highlights weaknesses not just for those who make policies but for the population so they can put some pressure on for more changes. And increasingly it is paying attention to these measures as they relate to the MDGs and the Monterrey Consensus, which says that donors are supposed to put in more resources but the recipient countries on the other side are supposed to improve their performance so the resources can be used more efficiently and effectively.

Mr. Ngo then went on to discuss more of the details of the CPIA and how it is used; how the four clusters work, what is looked at, and then the process and the methodology of the process.

First of all the allocation of IDA resources are on a per capita basis, so once you’ve got the number you multiply it by the population and you have the allocation for the country. The CPIA accounts for about 80% of the weight and the remaining 20% is accounted for by the quality of the portfolio management.

Then in terms of the elements that are taken into account before they come up with a rating. Mr. Ngo went through the clusters, explaining in some detail what is looked for in monetary policy and fiscal policy, debt policy and so on. For example, in fiscal policy there the issue is fiscal sustainability, so revenue minus expenditures, whether the gap is manageable. One consideration is fiscal deficit, and secondly they look at the capacity of the country to adjust to shocks. There is the question of whether or not there have been adequate provisions for both infrastructure and service delivery. And they don’t just look at the total balance, they also look at how the money is used—expenditure allocation.

In terms of process, the first phase is called the benchmark phase, where 19 countries are selected who represent good performers, average performers and poor performers and the Bank does a rating for these countries mainly to ensure that across regions there is consistency. Then they go on developing the rating for the remaining countries using the benchmarks as comparative criteria. The country teams have primary input and the chief economists for the region are responsible of seeing that there is no bias. Then there is a second round of checking as well by others in the Bank and other non-bank measures are checked for comparisons. In addition, in 2004 there was an external panel that evaluated the whole process. They confirmed many of the things that were being done right. They also made recommendations including that the Bank needs to involve the countries much more.

Regarding disclosure, the Bank is disclosing ratings by printouts for the total averages in clusters, as well as the country rating, and starting next year (2005-2006), there will be full disclosure of the detailed ratings, but for the time being the writeups will not be disclosed because there is a lot of information that countries are reluctant to have made publicly available.

Nancy Alexander from the New Rules for Global Finance Coalition was the next speaker on the agenda.

As a prelude, Ms. Alexander first noted how things at the Bank had improved in her more than 20 years of lobbying. It wasn’t until 1989, she said, that the Bank “had its epiphany” and adopted addressing poverty as it purpose. She also pointed out other changes that had taken place.

She then said she wanted to begin her remarks by noting what she saw as three key purposes of the CPIA (1) to allocate loan and grant resources, (2) to determine the policy directions of new operations not only of the World Bank but of other donors and creditors and (3) to influence the debt threshold targets or how much a government will be allowed to borrow or receive. She then raised a number of questions about the CPIA.

1)       Why should there be a CPIA framework where the rich countries are saying to the poor countries do as I say not as I do? Poor countries are subject to punitive actions when they are either imprudent or differ from the financial institutions in their determination of what constitutes good policies.

2)       Why should middle income countries have rights to discretion over the CPIA that low income countries do not? The CPIA ratings over middle-income countries remain “shrouded in mystery.” And low income countries are required to agree to the disclosure of their ratings

3)       Why apply what she said was an admittedly “crooked yardstick” to government performance? CPIA ratings involve a one-size-fits-all approach when there is not agreement among development practitioners about what constitutes good policy in many areas. Moreover, all of these ratings are based on a debatable belief about the role and the purpose of the State. Even if there were agreement on what constitutes good policy there are differences of opinion about the sequencing and implementation of policies as well as their impact. In other words, the CPIA is a subjective instrument. And it violates the Bank’s articles of agreement which require that the Bank not to enmesh itself in domestic politics by judging the political choices of regimes.

4)       In producing the CPIA ratings does the Bank have a conflict of interest? The Bank’s Operations Evaluations Division (OED) has pointed out that the CPIA rating reflects the Bank’s performance in each of the countries and that brings a whole other level of subjectivity. It also brings a tension, sometimes which extends for years, between the government’s choice and Bank preferred policy, and here she mentioned two examples of pushes for privatization by the Bank, one in Malawi and one in Ethiopia.

5)       Is the CPIA pro-growth or pro-poverty? Can the same spectrum of policies as embodied in the CPIA be good for countries at every stage of development?

6)       Another question related to competitiveness. How for instance she asked will a country’s performance be rated when it is trying to compete with China? And when the U.S. becomes the “consumer of last resort” what is going to happen to developing countries and how will that be viewed by the Bank? In this context she raised a point that scholars have made: that leaders contend that liberalization creates growth instead of acknowledging that for developed countries it was the opposite.

7)       When the Bank gives low ratings to a certain government policy in the context of the CPIA, then the institutions new lending operations will be geared to correct the perceived weakness. If the CPIA provides the basis for policy prescriptions in the borrowing country, why should citizens and countries participate in the PRSP process?

8)       Does the CPIA contribute to double messages of donors and creditors? In terms of the DSA low-countries are by definition, as the Banks says, vulnerable to external shocks so does it make sense to justify high levels of indebtedness in countries just because they are doing the bidding of the creditors and thereby getting a higher rating on the scale.

9)       And finally, is there not going to be gong to be vicious competition for a potentially shrinking pool of grants. The pool has risen over the short-term, but if one looks at the longer terms it has shrunk.

Mr. Wilks, after thanking Ms. Alexander introduced the discussion period asking that participants not focus on the details of the CPIA, but where should we go with this instrument. Can it be fixed? Should something more fundamental be done about it?

Two speakers were already lined up for interventions, Mr. Jack Jones Zulu and Ms. Sona Varma from the World Bank.

Mr. Zulu had a couple of comments:

First, what may be good to the Bank or the Fund may not be good for the implementing country, it may not have the intended results, and he focused on privatization, giving a couple of examples. So, he said, it is important to give latitude to the implementing countries to do what is deemed to be good for their citizens rather than what makes sense to the Bank and the fund, given all the bad experiences that countries are having with privatization.

Second, He said that he felt that the HIV/AIDS pandemic constitutes an external shock and that it is linked to the way the Bank determines sustainability.

And finally he returned to the issue of privatization saying that in Zambia, his country, Zambia earned $1.5 billion from exports largely because of the good performance of the copper industry but much of that is in private hands not in government coffers.

Ms. Varma intervening, said that the Bank had not done a good job communicating because there are big misconceptions about the DSA framework. First, she addressed several points that Mr. Merckaert had made.  She said there is no preconceived notion that there will be no debt cancellation in this framework. What this framework does is “give you a way to think about a world after debt relief.” Debt relief is not the “end game”. There is much more to do after debt relief. That was point one. Point two was that Mr. Merckaert suggested that the Bank doesn’t give consideration to the MDGs in this framework. That again is not true. The framework is very flexible. If for instance it is felt that the country needs 100% increase in expenditures to meet the MDGs that can be put in the baseline.

Mr. Merckaert made the point as well about the mistakes made in the past. She said the Bank and the Fund have created this framework to correct their own mistakes and to make sure that they do business the right way moving forward. What it does is to tell the Bank and the IMF, can the country handle more debt in an assistance package or does it need more grants.

About the CPIA she said there is a lot of debate inside the Bank as well as outside the Bank, but a measure of performance is needed to determine the debt carrying capacity in a country, and what has come out very clearly in the research is that countries that have better performance and better policies are able to carry higher levels of debt, that means that they can borrow a little more without running into trouble. If the CPIA is a questionable tool, that too can be changed under the new DSA.

Mr. Wilks: What is the status of the DSA framework?

Ms. Varma: We made changes to address the boards’ lower tolerance for debt risk and the Fund and the Bank have agreed to adopt it.

A speaker from Action Aid said that he didn’t understand Ms. Varma comments about how to meet the MDGs you could start with a higher base line.

A second speaker asked for a point of clarification: how did the DSA arise, was it from the Board or the staff and was it a World Bank, and IMF initiative, because it was his understanding the IMF was no longer involved?

A third speaker made several points about Bolivia saying that poverty alleviation was impossible under the regressive tax system, which is primarily based on consumption taxes, so no matter what poverty implementation scheme was put in place, the effect would be little on none. She also challenged the emphasis on things like governance as a criterion instead of the emphasis on hunger when 60% of the people suffer from hunger. And she added Bolivia is one of the best students of the IMF.

The fourth speaker had a “very significant” problem with the CPIA and felt there should be a suspension of it, in terms of the DSA. One of several problems he cited was that, he said, Mr. Ngo maintains that the CPIA is not about outcomes but an OED evaluation 4 to 5 years earlier said that it was ending up evaluating outcomes. Another referred to the process of analysis and the benchmarking phase that Mr. Ngo discussed and how decisions were made about what constitutes the best performers. He also said the OED evaluation had said that the proven ability of the CPIA to predict growth was very low.

A fifth speaker, following up, also asked for a clarification on the relationship between the CPIA and the DSA.

A sixth speaker said that the CPIA was actually a “superfluous instrument” that comes from “old thinking.” If, he said, this instrument is absolutely necessary then there should be indicators on pro-poor growth, he said, and the distribution of growth and investment into incomes and assets of the poor deserves its own field.

The Bolivian speaker further explored the CPIA system, describing a certain model country and asking what kinds of marks that country would get.

Another speaker said the CPIA was generating conceptual confusion, that the indicators were not neutral. Indicators, he said, are political because development is political. He also mentioned the contradiction he sees between the PRSP process and the CPIA process.

Mr. Merckaert came back with another question, saying the CPIA was conceived as an allocation criterion but at the end it produces clear incentives for change and is a conditionality. So the question is, is the CPIA being reviewed within the conditionality review that is currently happening in the Bank? Also he said, the Bank is trying to do several contradictory things at the same time with the CPIA. For example there may be some policy reforms that are good for poverty reduction but bad for the capacity of the country to repay its debts.

Mr. Ngo responded to the remarks and questions saying that many of the points were very valid but that the best way to look at them was not in the abstract but to go back to the country and look at specifics. In this context he discussed subsidies and the sustainability of the strategies in terms of ratings. And in general he said, when you put the CPIA in a country context, what he sees it bringing to the table is help to point up some of the incoherence across policies or policies across sectors.

He also talked about monetary policy and support for the private sector, saying that among the considerations for the Bank was looking at what share of credit by the banking sector was going to the public sector and what share was going to private sector and whether monetary policy does or does not support private sector development. Here he said it is again a question of consistency between what governments says they want to be doing and what they are doing.

On the issue of regressive tax policies, he said that tax policy was a dimension of one of the indicators and that policies based mainly on sales tax would be considered regressive and would be a negative.

Regarding the judge and jury question, he said it was difficult because there is not sufficient development assistance to cover all the needs of developing countries and therefore donors are having to make choices, and the choices are going to favor countries that have better policy frameworks.

Saying that he could not answer the questions one by one, he turned then to the concern voiced about the CPIA and the PRSP. The way he sees the CPIA having a role with the PRSP is the following: Even though the PRSP is country led, there are many issues that can not be brought up to the surface, and the CPIA can help bring those issues up and put them in perspective, which is otherwise not possible because of the political situation.

Ms. Alexander began her responses by saying that the question of the use of the CPIA in the DSA was really an important one and she suggested more conversation about it after the meeting. The second point was that while every creditor needs a performance measure, the question is what kind and is it appropriate to look at every country at every stage of development as needing more or less the same policies. Thirdly, the CPIA is highly ideological. She also said that she doesn’t see countries with regressive taxes being penalized.

Mr. Wilks mentioned a recent communiqué from the HIPC Finance Ministers who had some major procedural and process problems with the DSA and some of the same concerns and civil society organizations.

He then made several points in summary. First, he said he thought the meeting had been very useful but he said there was still a lot of confusion in the room, and if there was confusion within this group, the ones who really study the issue, there would be ten times the confusion among other civil society groups. There is, as Ms. Varma mentioned, a really a big problem of communication from the Bank. Also there is a big distance between people on the civil society side and people on the official side in terms of whether such measures should be refined or whether there are fundamental problems with the CPIA.

He said his belief was that there was a real question about whether these policy matters should be reconciled in a technical way by World Bank staff. Is it possible he asked or politically desirable for these difficult political tradeoffs to be made in such an exercise? Citing a number of books, he said the real question was who is in control of these policy choices? He said that a number of civil society groups in the room would continue to look into the implementation of the new DSA framework and the CPIA and try to work out whether there are fundamental contradictions with some of the processes/policies especially around the PRSP and some other promises that had been made on opening up downward accountability.

He then closed the meeting, thanking everyone for their participation.