Africa: Background on IDA

Africa Policy E-Journal

Africa: Background on IDA
Date Distributed (ymd): 970405
Document reposted by APIC

The following background analysis comes from Bread for the World, , 1100 Wayne Avenue, Suite 1000, Silver Spring, MD 20910, Phone: 301-608-2400, Fax:301-608-2401, E-mail: bread@igc.org.

THE WORLD BANK'S INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA)

What is IDA?

IDA is a World Bank program which lends funds at very low interest rates (.5% over 35-40 years) to the world's poorest countries. IDA disbursed $5 billion in such "soft" loans to poor countries in FY 1996. IDA's largest borrowers are India, China, and Vietnam. IDA programs are funded for three-year periods by 33 donor countries.

From 1994 to 1996, 75 percent of all IDA loans supported investments in infrastructure, agriculture, and basic social services (education, population, health and nutrition). The remaining 25 percent supported economic reform, or "structural adjustment" operations. However, most adjustment lending was concentrated in Africa, where adjustment represented almost half all IDA loans, although the share is now falling.

Why does IDA matter?

Seventy-nine countries, home to 80 percent of the world's people living in absolute poverty, are eligible for IDA loans. The countries that receive IDA loans have an average income of $400, compared with $4,000 for countries that receive grants from the U.S. bilateral aid agency (AID). The World Bank's member governments have targeted approximately 45-50 percent of IDA's resources for Africa and IDA is the largest source of development finance for Africa.

Furthermore, the World Bank provides economic policy advice to borrowing country governments, and its "stamp of approval" is critical to the lending and investment decisions of other donors and the private sector. In fact, other regional development banks and some industrial country donors model their policies and aid programs on that of the World Bank.

What are the criticisms of IDA?

IDA's performance and that of the World Bank generally has been extensively critiqued by non-governmental organizations, academics, and even by the Bank itself. Following are some of the major concerns:

Structural adjustment. Since the 1980s, the Bank has shifted from lending exclusively for development projects, to lending tied to "structural adjustment" reforms that are intended to restore financial stability and promote economic growth. Typical reforms are privatizing state-owned organizations, increasing exports, removing subsidies and price controls for farmers, reducing government spending on education and health, and devaluing currencies. Structural adjustment reforms have been planned with too little regard for the impact on poor people and many have entailed social hardships. In response, the Bank has supported "social safety nets" to mitigate the negative impact, rather than designing and implementing policies that benefit poor people.
Lack of participation. Structural adjustment programs as well as projects are often designed in Washington or with a borrowing government's finance ministry with little prior consultation of affected populations. Non-governmental organizations sometimes have difficulty getting access to information about key World Bank policies, such as its threeyear assistance strategies for each borrowing country. Some Bank programs and projects have been widely criticized for waste, environmental destruction, social dislocation, and even corruption.
Undemocratic governance. Voting power on the World Bank board is based on financial contributions, rather than on the principle of "one country, one vote". The world's five richest countries hold almost 40 percent of votes, of which the US share is 17 percent. This imbalance of voting power steers the Bank toward the interests of the industrial countries. Yet the Bank has little leverage over the policies of industrial countries, which often don't practice what they preach through the Bank about fiscal, monetary, trade, or adjustment policies.
Debt. Some countries have used IDA funds to help pay back the debt they owe to the World Bank for past loans. Such debt repayments are sapping scarce financial resources away from investments in health care, education, and other human development. Although the Bank has recently agreed to a modest debt reduction plan for a limited number of countries, the Bank has failed to adequately address the root causes of indebtedness in poor countries.

Civil society organizations in both industrial and developing countries have exerted considerable pressure on the World Bank, directly and through their own governments, to address these criticisms. In response, the Bank has initiated some reforms, especially under the current president, James Wolfensohn. For example, the Bank has adopted a plan to increase popular participation in projects and policies; increased lending for health, education, and population; canceled several dam and large infrastructure projects which might have damaged the environment and displaced people; and initiated a joint Bank-NGO review of the social and economic impact of structural adjustment. However, changes in practice has lagged behind changes in rhetoric and in policy.

What do southern partners say about IDA?

Most overseas non-governmental organizations with whom we collaborate give qualified support for IDA. In 1995, a group of African development NGOs issued a statement urging support for full funding for IDA. However, the statement raises criticisms and calls for a series of qualitative improvements, including a more central focus on poverty reduction and equity in the Bank's economic policy prescriptions and lending practices, greater participation by local organizations of civil society in the Bank's process, and a reduction in the share of loans for structural adjustment.

The same year, 11 Asian NGOs issued a similar statement, urging support for IDA funding conditioned upon the Bank's progress toward reform. These include more direct targeting of poverty reduction, a rejection of current structural adjustment approaches, full participation by affected communities throughout all projects, and changes to Bank staffing and operational practices.

Some southern NGOs partly blame U.S. critics of the Bank, especially environmentalists, for the recent deep cuts in U.S. funding for IDA.

What is Bread for the World's position?

Bread for the World takes a position similar to that of our southern partners -- namely, support for full funding while conditioning future support on IDA progress toward better development results. The statements of colleagues in Africa and other developing regions have been important in our decision to support IDA. In 1994, Bread for the World adopted a policy which conditions future support for IDA on specific reforms, including:

greater openness and participation at all levels of its policy and lending operations;
reducing the share of lending for structural adjustment and focusing adjustment on policies which benefit poor people and preserve the environment;
greater focus on poverty reduction in projects;
reevaluating economic growth strategies to fully account for social and environmental impacts;
action to reduce debts owed by poor countries to the Bank itself and other multilateral institutions, governments, and commercial banks.

In 1996, Bread for the World graded the Bank's progress on these reforms and, overall, gave the Bank a "C" average. Bread for the World concluded that while the Bank's rhetoric had shifted and some policies had been changed, the Bank has a "poor record of putting its policies into practice."

What is the US stance toward IDA?

The U.S. government has helped secure important reforms in the World Bank. For example, Congressional pressure helped make the World Bank more concerned about environmental problems, and promoted policies for improved access to Bank information. The U.S. Congress also helped persuade the Bank to establish an independent appeals mechanism for citizens who have been adversely affected by a Bank project.

More problematic is the failure of the United States to fulfill U.S. financial commitments to IDA. The United States used to be the largest donor to IDA, but by now the U.S. contribution has fallen to less than 15 percent, second to Japan. Between FY 1995 and FY 1997, Congress slashed US funding for IDA from $1.175 billion to $700 million. The steep cuts caused the US government to fall into arrears and sharply reduced its financial commitment to IDA's current three-year funding cycle. Because other donor governments peg their contributions to that of the United States, IDA's funding could collapse.

Because of the U.S. failure to fulfill past financial commitments, U.S. negotiators agreed with European partners in early 1996 that the United States would not contribute for a full year while it tried to make up arrears. During that year, U.S. companies and U.S. private voluntary organizations would be ineligible for IDA-funded contracts. There have been no complaints from U.S. businesses or U.S. PVOs about this. However, some members of Congress were upset by the arrangement, and used it as reason for further curtailing FY 1997 funding for IDA.

The Clinton Administration has submitted a FY 1998 budget request to Congress that seeks $800 million for FY 1998 and an additional $234 million to pay off arrears, for a total of $1.034 billion. The administration has made IDA funding a top priority, and will likely press the Congress to appropriate the full amount.

Kathy Selvaggio
International Policy Analyst
Bread for the World
February 27, 1997

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