Crisis Response and Resilience to Systemic Shocks Lessons from IEG Evaluations © 2017 International Bank for This work is a product of the staff RIGHTS AND PERMISSIONS Reconstruction and Development / of The World Bank with external The material in this work is subject The World Bank contributions. The findings, to copyright. Because The World Bank 1818 H Street NW interpretations, and conclusions encourages dissemination of its Washington, DC 20433 expressed in this work do not knowledge, this work may be Telephone: 202-473-1000 necessarily reflect the views of The reproduced, in whole or in part, for Internet: www.worldbank.org World Bank, its Board of Executive noncommercial purposes as long as Directors, or the governments they full attribution to this work is given. represent. Any queries on rights and licenses, The World Bank does not guarantee including subsidiary rights, should be the accuracy of the data included in addressed to World Bank Publications, this work. 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Contents Abbreviations 3 Executive Summary 4 1| Introduction and Purpose 6 2| Helping Countries Build Resilience and Recover from Systemic Shocks 8 Fiscal Policy Responses to Systemic Shocks 10 Financial Policy Responses to Systemic Shocks 14 Social Safety Net Policy Responses 18 Environmental Policy Responses to Natural Disasters 22 Multipronged Policy Responses to Pandemics 26 3| What Lessons Emerge from the Evaluations? 29 Lessons from World Bank Group Intervention Modalities 29 Lessons from International Responses to Crises 31 Lessons from the World Bank Group’s Approach, Internal Coordination, and Work Quality 32 Areas Where More Knowledge Is Needed 34 Bibliography 35 Figure Figure 2.1. Dimensions of Resilience Addressed by the World Bank Group Portfolio and Corresponding IEG Evaluations 9 Boxes Box 2.1. Country Context Matters—Expenditure Protection Programs in Health 13 Box 2.2. Weather Index Insurance in India and Mongolia 17 2 INDEPENDENT EVALUATION GROUP Abbreviations CAT DDO Catastrophic Deferred OECS Organisation of Eastern Drawdown Option Caribbean States CCPE clustered country program evaluation PSNP Productive Safety Net Program DDO deferred drawdown option WHO World Health Organization DPO development policy operation FAO Food and Agriculture Organization FIL financial intermediary loan GFDRR Global Facility for Disaster Risk Reduction GFRP Global Food Crisis Response Program GPAI Global Program for Avian Influenza Control and Human Pandemic Preparedness and Response ICRR Implementation Completion and Results Report Review IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 3 Executive Summary The development community has internalized The World Bank Group generally responded nimbly the reality that efforts to reduce poverty and build to shocks and refashioned some of its instruments resilience to shocks are complementary. Systemic to handle different kinds of crises. It appropriately shocks affect the poor and non-poor, push some focused attention on the impact of shocks on the non-poor into poverty, keep the poor in poverty poor and vulnerable, including through designing longer, affect the development trajectory of flexible social safety nets with better targeting. countries, affect service provision, and possibly Much of this success reflected a willingness to cost human lives. Several of the Sustainable work closely with international and national partners Development Goals integrate the concept of to address priority needs if a shock occurs. But resilience. Furthermore, in the World Bank’s perhaps the most significant finding is that although new strategy adopted in October 2013—achieving the World Bank Group continues to support quick the twin goals of eliminating extreme poverty and effective global response to crises, it has and boosting shared prosperity in a sustainable taken a lead in helping countries develop resilience manner—resilience is at the heart of the three- to potential shocks proactively. The World Bank pronged view of sustainability: fiscal, social, Group built the need for resilience into its analytic and environmental sustainability. work and lending operations in most sectors, and it used its policy dialogue with client countries to During the past decade, the Independent Evaluation emphasize the importance of creating institutions Group (IEG) evaluated the World Bank Group’s and policies to enable them—and particularly response to systemic shocks and its efforts to help the poor and vulnerable—to withstand shocks build resilience in response to shocks such as the and recover rapidly after them. The World Bank food crisis of 2007–08, the global financial crisis Group was most effective in supporting country of 2008–09, natural disasters, climate change, response to shocks when it conducted a robust and pandemics. These evaluations examined program of analytic work relevant to resilience, the response to each of these different shocks built on this work in the programs it supported, separately. This study examines the evaluations and did so for a sustained period. The World Bank and learning products to draw general lessons Group has had a particularly important role in from the experience that can help strengthen future developing innovative instruments for insurance support to countries’ resilience-building efforts. against natural disasters and climate shocks. 4 INDEPENDENT EVALUATION GROUP However, more needs to be done to strengthen in some cases, but in others, these reforms were countries’ monitoring mechanisms and capacity not sustained after the crisis passed, and in in preparing for shocks and dealing with their those cases, the underlying political commitment aftermath. At the World Bank, many financial to the reforms was often inadequate. intermediary loans (FILs) disbursed slowly during Going forward, it would be useful to keep the global financial crisis and were ineffective in monitoring the international community’s providing working capital for the private sector. resilience interventions and individual country The implementation of the range of instruments responses to see the extent to which they have developed by the International Finance Corporation continued the shift toward upstream work and (IFC) for the same purpose was slower than a focus on vulnerability reduction. Specifically, expected. The World Bank Group should consider it would be useful to assess the extent to which strengthening its internal coordination of crisis the international community has contributed to response to promote better knowledge sharing building up social protection mechanisms that across its global practices. Governments should be can be scaled up and targeted to the poor and more purposeful in leveraging crises to undertake vulnerable in response to systemic shocks. structural reforms. Reforms undertaken as part of the crisis response helped to build resilience CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 5 1 Introduction and Purpose The topic of resilience has gained prominence on finance and reserve funds, and universal access the development agenda. Many of the Sustainable to early warning systems would also reduce well- Development Goals relate to resilience. In the 1 being losses from natural disasters. If all countries World Bank’s new strategy adopted in October implemented these policies, the gain in well-being 2013—achieving the twin goals of eliminating would be equivalent to a $100 billion increase in extreme poverty and boosting shared prosperity annual global consumption (Hallegatte et al. 2017). in a sustainable manner—resilience is at the This synthesis of existing evaluations seeks to draw heart of the three-pronged view of sustainability: lessons from key IEG evaluations of World Bank fiscal, social, and environmental sustainability. Group support for strengthening client country Efforts to reduce poverty and build resilience to response and resilience to systemic shocks. The disaster risks are complementary. Estimates for synthesis is concerned exclusively with systemic 89 countries find that if all natural disasters could shocks—that is, shocks that affect highly significant be prevented in 2017, the number of people in numbers of economic agents in at least one extreme poverty—those living on less than $1.90 country, possibly several—and the impact of which a day—would fall by 26 million. The impact on unfolds during a relatively short time. The paper poverty is large because poor people are exposed considers four families of systemic shocks: the to hazards more often, lose more as a share sharp increases in food prices in 2007–08, the of their wealth when affected, and receive less 2008–09 global financial crisis, natural disasters, support from family and friends, financial systems, and pandemics. It brings together findings from and governments. Disasters can push people IEG evaluations or learning products dealing with into poverty, so disaster risk management can the World Bank Group’s responses to the food be considered a poverty reduction policy, and crisis and the global financial crisis; support for because poverty reduction policies make people social safety nets, environmental sustainability, and less vulnerable, they can be considered part of climate change (to the extent that it results in more the disaster risk management toolbox. Action frequent and severe environmental shocks);2 the on risk reduction has a large potential, but not Global Facility for Disaster Risk Reduction (GFDRR); all disasters can be avoided. Expanding financial avian influenza; and engagement in small states inclusion, disaster risk and health insurance, social and resource-rich countries.3 The bibliography lists protection and adaptive safety nets, contingent all evaluations and learning products covered. 6 INDEPENDENT EVALUATION GROUP For this synthesis paper’s purposes, resilience and social transfers are likely to be an important is defined as a country’s capacity to prevent, part of the response to almost all kinds of shocks. mitigate, and/or respond effectively to shocks. The World Bank Group generally uses its support When a systemic shock occurs (depending on the in response to shocks to help build resilience in type of shock), it can involve loss of life, disability, the medium and long term. Many, if not most damage to infrastructure and housing, loss of World Bank Group operations after crises address livelihoods, reductions in government support both the immediate needs for budgetary resources for essential services and social transfers, stress or rehabilitation of housing and infrastructure to the financial system, and so on. Resilience, and the policies that need to be put in place to therefore, is the capacity to take actions that can achieve resilience, such as better public financial prevent or mitigate these impacts or promote a management and resilience standards for rapid recovery from them. This capacity can map construction. Recent IEG evaluations tend to look broadly into the following three dimensions: at building resilience and responding to the crisis • Economic resilience: the capacity of the fiscal as two sides of the same coin, and they tend to and financial systems to absorb shocks. assess how well World Bank Group operations • Social resilience: the extent to which individuals addressed both these aspects. Drawing on those are supported to recover from systemic shocks. evaluations, this paper took a similar approach. • Resilience to environmental shocks: enabling physical structures and the agricultural economy to withstand natural disasters and recover from them. Resilience in this context is broadly defined to cover 1 For more information, visit the United Nations Sustainable Development Goals website at http://www.un.org/ both the short-term response to shocks and the sustainabledevelopment/sustainable-development-goals/. medium- and long-term building of resilience, but it is useful to remember the different nature of these 2 Climate change is not a short-duration shock, but this two components. Shocks have an impact on a study includes selective aspects of the climate change agenda because of evidence that climate change is country and its citizens, regardless of the level of increasing the severity and frequency of natural disasters preparedness. Even countries with high resilience and weather-related shocks. experience problems when shocks are extremely severe (for example, Hurricane Katrina in the United 3 The study covers topics that IEG evaluated, and therefore gaps in coverage exist for topics not yet evaluated (for States and the Tohoku earthquake and tsunami in example, the city strength approach to building urban Japan). Therefore, along with building resilience, resilience and the use of remote disaster assessment). the World Bank Group also supports countries in responding to shocks when they occur. The crisis response brings together both the short- term objectives of supporting a rapid recovery and the medium- and long-term objectives of building resilience. Response mechanisms also cut across different kinds of crises. For example, fiscal policies CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 7 2 Helping Countries Build Resilience and Recover from Systemic Shocks The succession of systemic shocks affecting developing countries in the past decade has required the international community to respond more frequently. The food crisis and the global financial crisis led the World Bank to double its lending for crisis response during 2008–10 compared with the previous three years. IFC responded to the financial crisis by developing a range of new instruments designed to build private sector resilience to the shocks. The World Bank’s engagement in responding to pandemics began with its commitment at an early stage of the HIV/ AIDS global crisis, and it used that experience in later pandemics such as severe acute respiratory syndrome, avian influenza and, most recently, the Ebola virus. IEG’s 2006 evaluation Hazards of Nature, Risks to Development: An Evaluation of World Bank Assistance for Natural Disasters and World Development Report 2010: Development and Climate Change enhanced the World Bank’s increasing focus on the impact of natural disasters and climate change. The evaluative evidence suggests that the World Bank Group has helped countries build resilience and recover from 8 INDEPENDENT EVALUATION GROUP FIGURE 2.1. Dimensions of Resilience various dimensions of resilience and associated Addressed by the World Bank Group Portfolio policy responses are often intertwined (Figure 2.1). and Corresponding IEG Evaluations The World Bank Group has often adopted an integrated policy approach to building resilience & FINANC that brings out the synergies among these different L A dimensions. The evaluative evidence suggests C IA that the World Bank Group has helped countries FIS L A build resilience and recover from systemic shocks using a multipronged approach. It supported a wide range of investments and policy responses specifically for building resilience in the face of each different type of shock. For example, in response to the food crisis, the World Bank Group supported fiscal, social safety net, and agricultural sector policy responses. Prices of TA LC food staples and other agricultural products O S C more than doubled between early 2007 and EN IA LB mid-2008. A concurrent rise in petroleum M N prices compounded the impacts. The increases ENVIRO came after a long period of low and relatively stable global food prices, and their magnitude a. See recent IEG evaluations on the global food and caught many governments off guard. In 2008, economic crises and engagement with resource-rich the World Bank established a $2 billion Global countries (World Bank 2010a, 2012b, 2013, 2015b). Food Crisis Response Program (GFRP) aiming to reduce the negative impact of high and volatile b. See recent IEG evaluations on social safety nets, global food prices on the lives of the poor and support food and economic crises, Global Facility for Disaster Reduction and Recovery, avian influenza, health financing, governments in the design of sustainable policies and small states (World Bank 2011c, 2012b,d, 2014a,c, that mitigate the adverse impacts of high and more 2016a,b,c). volatile food prices on poverty. It also aimed to support broad-based growth in productivity and c. See recent IEG evaluations on climate adaptation, engagement in resource-rich developing countries, and market participation in agriculture to ensure an small states (World Bank 2010a, 2012a,b, 2016a,b,c). adequate and sustainable food supply. The GFRP provided a menu of fast-track interventions that could be processed as emergency projects. The World Bank Group has supported fiscal, systemic shocks using a multipronged approach. financial sector, and social safety net policy It supported a wide range of investments and responses to the global economic crisis and policy responses specifically for building resilience multisector actions to address the link between in the face of each different type of shock. The natural hazards and development. IEG evaluations CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 9 have assessed the response to the contractionary and long term. The World Bank Group supports the impact of the 2008–09 global recession and response to systemic shocks in the following areas: its contagion on developing countries. The • Fiscal response through the provision of World Bank Group helped improve resilience funds to help cover the budgetary impact to shocks by providing financial and technical of the crisis to safeguard or support the support through these various types of policy public expenditures that are most relevant responses. It considers efforts to reduce people’s to the welfare of the poor and vulnerable. vulnerability to environmental and natural hazards • Financial response through helping banks a priority. One of the most important steps toward to strengthen their balance sheets and this objective was the creation of the GFDRR as to make resources available for working capital to small and medium enterprises. a World Bank–managed multisectoral and global partnership that helps developing countries • Social safety nets, which can protect the poor and vulnerable in the event of a systemic shock. better understand and reduce their vulnerability to natural hazards and climate change. • Response to environmental shocks and pandemics through participating in Building resilience requires anticipatory policies international efforts to rehabilitate damaged and investments as well as support provided in infrastructure and housing and, in the case of pandemics, to treat victims, contain the the aftermath of shocks. The World Bank Group’s spread, and support the survivors. approach to supporting resilience has evolved during the past two decades, moving from a reactive response to crises and supporting post- Fiscal Policy Responses to crisis measures to mitigate the impact of future Systemic Shocks shocks to anticipatory policies and investments that FISCAL POLICY RESPONSES TO THE build resilience into a wide range of World Bank– 2007–08 FOOD CRISIS supported programs in almost every sector. IEG The 2007–08 food crisis stretched the fiscal has conducted evaluations covering both a single capacity of many governments in low-income dimension of resilience, such as climate change countries, and the international community’s adaptation or social safety nets, as well as multiple response appropriately included fiscal support to dimensions of resilience that overlap as seen in its governments to enhance their ability to mitigate work on the first and second global food crises and the impact of the crisis on their poor population. clustered country program evaluations (CCPEs). However, the effectiveness of such fiscal support The evaluations cover the World Bank Group’s depends on institutional capacity in the field and response to the food price and global economic the availability of scalable social programs. An crises, environmental shocks, and pandemics. IEG evaluation found that World Bank–supported IEG conducted some of these evaluations shortly fiscal policy responses to the food price crisis after the particular crisis. Although they capture the were only modestly effective and likely had limited relevance and effectiveness of the immediate crisis impact. Where targeted safety nets could not response effort, they could not evaluate to what be expanded, food subsidies, lower tariffs on degree the measures build resilience in the medium imported food, and the use of strategic reserves to lower prices for all consumers were considered 10 INDEPENDENT EVALUATION GROUP acceptable. Similarly, input subsidies were outcomes related to the food crisis—poverty and recommended where credit and input markets malnutrition—were not sufficiently tracked to allow were underdeveloped. However, because tariffs a meaningful assessment of the welfare impact of and taxes on food staples were low in many the World Bank–supported short-term response. cases, rate reductions did little to help vulnerable groups while subsidies aggravated fiscal positions FISCAL POLICY RESPONSES TO THE and put other government programs at risk. GLOBAL ECONOMIC CRISIS The World Bank sought to strengthen In many countries, fiscal policies to support three distinct fiscal dimensions in agricultural supply responses did not produce response to the global financial crisis: downward pressure on domestic food prices. The World Bank supported targeting of input subsidies • Facilitating countries’ access to financing to smaller and poorer farmers for redistribution to mitigate the detrimental effect of fiscal reasons in some cases while in other cases it contractions, help improve fiscal positions, and supported programs that also benefitted large facilitate countercyclical spending in some cases. and better-off farmers to increase the supply • Protecting public expenditure in key response of the broader agriculture sector. The social sectors to mitigate the impact of the crisis on the poor and vulnerable. unavailability of necessary inputs precluded the full supply response from materializing • Building economic resilience through helping countries implement structural reforms to in several instances where the World Bank strengthen long-term fiscal sustainability, provided support.1 Furthermore, the coverage creating fiscal space for countercyclical of input subsidy operations was often too small responses to strengthen resilience to to generate significant impact at the national macroeconomic shocks in the future. level. Perhaps most significant, the key welfare Facilitating Access to Financing and Improving Fiscal Positions As many developing countries sought external financing to help them respond to the impacts of the global financial crisis in the face of limited or dwindling fiscal space, the ability of the international community to respond quickly and at scale was key. IEG’s evaluation of World Bank support for the global crisis response notes that a key line of action in mitigating the fiscal impact of the crisis consisted of a large increase in World Bank lending to cover increased financing gaps. The World Bank initially responded to the global financial crisis by increasing lending, especially for middle-income borrowers—in particular, the World Bank designed 67 crisis response development policy operations CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 11 (DPOs) focused on fiscal management. As the scale Overall, the crisis impact in most countries was of the demand became apparent, the World Bank not as severe as expected, partly because of took steps to get approval for an International international efforts, including the World Bank’s Development Association (IDA) fast-track facility. increased financing and policy advice. Furthermore, in some cases—notably in Indonesia— The specific actions that countries took to access precautionary World Bank funding under DPOs with more financing and to improve their fiscal positions DDOs served their purpose of helping countries varied across countries with equally varied meet their continued financing needs at reasonable outcomes. Fiscal impact mitigation programs, cost. The $2 billion Indonesia operation approved which involved strengthening both short- and long- in March 2009 and complemented by an additional term fiscal positions and bolstering governments’ $3 billion from other partners specified formal capacity to raise funds, provided mixed results. triggers for drawdown if financial market stress Along with helping meet financing gaps, DPOs exceeded specific thresholds. The operation supported measures to strengthen fiscal helped maintain the country’s access to financing sustainability, notably through improvements in the on international markets and supported financial cost-effectiveness of public expenditures.2 Such sector reforms and measures to uphold priority measures included, for example, improvements development and social protection spending, in the targeting of social entitlements or cuts on thus contributing to strengthening Indonesia’s low-priority administrative expenditures. However, resilience to crises in a more lasting way. other potentially demanding or politically sensitive measures were not often included in these Fiscal measures did not go far enough to achieve operations—for example, measures to better lasting impact mitigation in some countries, control the wage bill, reduce subsidies, or curtail however. World Bank DPOs with fiscal content low-priority public investments, which occurred supported bold expenditure control measures in one-third or less of crisis response DPOs. to improve fiscal stances in some cases, but the Equally low was the frequency of tax policy and measures were often insufficient. In many cases, tax administration reforms to improve revenue measures focused on improving budget processes collections. Prior actions or triggers that required in the medium term rather than actionable specific targets for the fiscal deficit, fiscal revenues expenditure rationalization or revenue mobilization and expenditures, or the public debt ratio were measures. Furthermore, the World Bank DPOs also less frequent. Some crisis response DPOs 3 often paid insufficient attention to the available with fiscal management content were intended to space for fiscal stimulus, the reversibility of stimulus bolster governments’ capacity to raise financing on measures, and forward-looking measures to attain capital markets despite the turmoil—of the 67 DPOs fiscal sustainability. The impact of the crisis on with fiscal content, 9 DPOs in seven countries fiscal positions was widely underestimated, as were designed as precautionary instruments indicated by deficits or debt (or both) that were with deferred drawdown options (DDOs). larger than projected in the countries where IEG conducted in-depth reviews of DPOs with fiscal content. Some instances of precautionary financing (such as World Bank development policy financing 12 INDEPENDENT EVALUATION GROUP with a DDO) achieved their intended objective of helping countries meet financing needs at BOX 2.1. Country Context Matters— reasonable costs, but in other cases, the contingent Expenditure Protection Programs feature had no impact on market access typically in Health because funds were drawn down immediately. Protecting Public Expenditures in Key IEG’s evaluation of World Bank support Social Sectors for health financing found that depending The nature of public expenditures and whether on the country context, the World Bank such expenditure should be increased or advised governments to increase their maintained depend on country contexts. IEG’s budgets for health or to protect health findings conclude that World Bank–supported spending during the crisis. This advice responses differed appropriately across countries. was often linked to proposals to create The World Bank supported protection or scaling fiscal space by introducing excise taxes up of social safety nets, key public investments, on products with potentially harmful and pro-poor spending.4 In Hungary and Ukraine, impacts on health. In countries with social initial spending levels on safety nets were high, and health insurance, the World Bank supported the fiscal impact of the crisis was severe. Therefore, enhancements in tax administration and the focus in these countries was on measures payroll tax collection. It also supported to improve targeting and contain expenditures, subsidies to finance contributions to risk including pension reform. In Colombia, Indonesia, pools for low-income groups and helped Mexico, and Vietnam, initial spending levels were governments introduce explicit targeting lower, so the focus was on assessing the poverty of subsidies. impact of the crisis and measures to alleviate the In Latvia, for example, World Bank policy social costs. Where there was fiscal space, more lending supported government efforts to than half of the DPOs included provisions to scale subsidize health payments for low-income up public works. Similarly, many crisis response households and increase the number of DPOs included fiscal measures that helped protect nurses in health facilities to accommodate or scale up pro-poor expenditures, as in El increased patient demand. Considering Salvador, Georgia, Ghana, Jordan, Poland, and fiscal austerity in Argentina, World Bank Romania. IEG’s global crisis response evaluation lending and policy advice helped ensure found that measures to protect spending on that basic and cost-effective health education and health were less frequent in DPOs programs were protected and received than increases in public investment. Even in continued financing, including reproductive low-stress countries, only about one-third of health care services for low-income groups. World Bank DPOs with fiscal management content Analytical work, such as public expenditure safeguarded education and health programs, and reviews and fiscal analysis, informed policy the proportion fell to 20–25 percent in countries and investment lending in these countries. with moderate and high fiscal stress. CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 13 Strengthening Resilience to Future Financial Policy Responses Macroeconomic Shocks to Systemic Shocks Building resilience for the future was somewhat pushed aside as a second order objective in FINANCIAL POLICY RESPONSE the face of intense pressures to deal with the TO THE GLOBAL CRISIS immediate impacts of the crisis. IEG’s global crisis World Bank Group–supported financial sector response evaluation found that crisis-related policy responses sought to bolster confidence, World Bank support for long-term resilience tended maintain credit access after the global crisis, to focus on public financial management reforms and build long-term resilience. During the global instead of concrete measures to strengthen economic crisis, a primary objective of World Bank medium-term fiscal sustainability. World Bank Group financial support and technical assistance— DPOs frequently focused on reforms in public complemented in most affected countries by an financial management and revenue administration.5 International Monetary Fund program—was to Although such reforms can be expected to help restore confidence in the banking system’s help strengthen fiscal sustainability in time, they soundness. This required ensuring that banks are typically long gestating. By contrast, the had the capital needed to withstand the increase World Bank’s DPOs appear to have paid limited in nonperforming loans because of the crisis, attention to the expenditure allocations and but also accelerating the process to strengthen revenue mobilization measures needed to create bank supervision and restructuring. A second or preserve future fiscal space for countercyclical objective was to ensure that the private sector stimulus measures if they are necessary. and particularly small and medium enterprises continued to have access to credit to meet The effectiveness of World Bank–supported their financing needs. A third objective was to sovereign wealth funds and fiscal rules in resource- help build consensus and implement the key rich countries varied markedly after the crisis. reforms required for the long-term resilience Sovereign wealth funds and fiscal rules are intended of the banking system and capital markets. as a self-insurance mechanism against terms-of- trade shocks in resource-rich countries. Contrasting World Bank Response experiences in Kazakhstan and Mongolia discussed The World Bank sharply increased the number in the resource-rich countries CCPE illustrate of its loans with financial sector content between both the potential of such approaches and the FY09 and FY10 in response to financial sector political economy difficulties they can encounter. stress. The World Bank made 106 loans with In Kazakhstan, government reform efforts some financial sector content to 57 countries, achieved visible progress in setting up and then with total commitments exceeding $28 billion strengthening conservative fiscal rules governing (about 27 percent of its total lending). Although a the use of oil earnings.6 By contrast, Mongolia’s few loans focused almost exclusively on financial efforts to use the crisis response to implement sector issues, most operations covered several fiscal rules and set up a sovereign wealth fund sectors, and a significant part of the operations’ for its copper earnings were not sustained.7 content was not directly relevant to the crisis. 14 INDEPENDENT EVALUATION GROUP In most countries with severe financial crises, the crisis: small and medium enterprises, exporters World Bank provided impactful support during the needing trade finance, rural businesses, and crisis and recovery phases. For example, Ukraine’s cooperatives. Although some FILs approved during first dedicated financial sector crisis operation the crisis disbursed rapidly, several had little or focused on immediate crisis needs: initial steps in no disbursement within the first 12 months.9 building a bank rehabilitation framework, setting Much of the World Bank’s financial sector support conditions for drawing on state funds for bank during the global crisis went beyond narrow recapitalization, and providing the central bank crisis response and focused on building medium- with enhanced powers to intervene in troubled term resilience. The actions supported by the banks. It also included measures to ensure multisector DPOs were often general, incremental, transparency in public funds use, enhancement of and medium term in orientation rather than crisis- the bank resolution framework, and strengthening related. Crisis financial sector prior actions were the payout functions of the Deposit Guarantee not easily distinguished from those in noncrisis Fund. Similarly, the World Bank operation in Latvia situations. Occasionally, significant financial focused primarily on issues relevant to the crisis: sector issues were neglected (such as the need improved stress tests for banks leading to a plan for improved banking supervision), reflecting the to determine additional capital requirements, legal speed with which operations were prepared. issues to enable more effective bank resolution, Although general and incremental, some reforms new flexibility in the insolvency law, corporate associated with loans to less-distressed countries, debt restructuring, and mortgage foreclosure. For such as Indonesia and Turkey, were a useful part longer-term financial resilience, the plan included of the medium-term agenda and had reasonable passage of better guidelines for supervision and prospects for sustainability. During the crisis period a review of financial consumer protection laws. in Turkey, DPOs supported strengthening banking World Bank efforts to bolster liquidity in countries supervision. For capital markets, they supported that did not face severe distress among financial fewer related-party transactions, greater disclosure institutions were of limited effectiveness. In a and investor protection, and the enactment of a larger number of countries, loss of liquidity did not new insurance law. Indonesia provides a good threaten fundamentally sound financial institutions, example of a crisis-response operation that but the crisis strained banks’ ability to extend supported reforms with medium-term benefits credit and led to an increase in the share of for the resilience of the financial system. The $2 nonperforming loans. In most countries, financial billion Indonesia Public Expenditure Support stress was manifest through increasing spreads on Facility Development Policy Loan-DDO (prepared borrowing and precipitous stock market declines. in collaboration with the Asian Development Bank, The World Bank addressed this mainly through a Australia, and Japan) supported the financial safety substantial increase in the number of FILs—lines of net regulation of 2009, which clarified the roles of credit through participating financial intermediaries Bank Indonesia, the ministry of finance, and the to private borrowers.8 The stated objectives of Deposit Insurance Corporation in ensuring financial 10 of the 16 FILs were to increase bank credit to stability in a crisis and if financial institutions fail. the private sector groups most affected by the It contributed to ensuring timely resolution of CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 15 failed banks while considerably increasing the overcoming the initial obstacles. IFC also set up coverage of deposit insurance. Another important the Infrastructure Crisis Facility to bridge the gap in advance was the enactment of legislation in 2011 financing for private or public-private partnership to revamp the supervisory framework. This led infrastructure projects in emerging markets. to the creation of an independent supervisor However, by the time the facility was operational, for all financial institutions and capital markets. there was a marked decline in the severity of the This reform made it possible for the independent crisis and less urgency to find alternative financing. supervisory authority to implement a model IFC sought to recapitalize financial institutions of integrated and conglomerate supervision and helped in resolving troubled assets, with and risk-based supervision in banking. mixed results. In February 2009, IFC established the Bank Recapitalization Fund, a private equity IFC Response and subordinated debt fund to support banks in Like the World Bank, IFC sought to address areas emerging-market countries. Although the initiative of vulnerability resulting from the global crisis. has considerable strategic relevance, it has Although IFC did not ramp up the overall volume of mixed results to date. Four of six recapitalization its investments or increase the risks, it increased projects were satisfactory in support for a systemic its commitments to the financial sector, which bank. However, in most instances, the facilities accounted for 63 percent of commitments in were too small to have a systemic influence. 2009–11. IFC deployed several instruments—loans, The Debt and Asset Recovery Program, also quasi-equity, quasi-loans, equity, guarantees, and established in 2009, aimed to reduce the level client risk management. Advisory services in risk of distressed assets in banking systems by management and the resolution of nonperforming investing in specialized companies that manage loans complemented its financial interventions. and restructure pools of distressed assets. Efforts to increase the availability of trade and However, the launch and implementation were infrastructure finance faced implementation delays, delayed, and the program has been unable to which lessened the full impact of these initiatives. meet its financing target of partnership investment As private corporations found it increasingly difficult three to five times the IFC investment. to obtain trade financing from both international IFC successfully provided assistance to financial markets and their own domestic financial microfinance institutions facing liquidity issues. institutions, IFC doubled the ceiling of the Global During the global financial crisis, the involvement of Trade Finance Program, a platform established institutional investors and lenders in microfinance in 2005, to $3 billion in December 2008. Another declined significantly, thus creating difficulties for platform used was the Global Trade Liquidity microfinance institutions to refinance their debt. Program, which mobilizes funding from IFC and IFC designed the Microfinance Enhancement Fund its partners to fund trade finance in individual to instill confidence in the availability of rollover banks. Because the facility’s implementation was financing and thus offset a potential reduction in slower than expected, the target disbursements access to financial services. During the crisis, the of $1.5 billion to $2.5 billion were not met in fund helped restore stability in microfinance lending FY09. However, the program met its targets after 16 INDEPENDENT EVALUATION GROUP and therefore helped existing clients manage liability and did not meet expectations. Weather index and liquidity. After the crisis, its portfolio expanded insurance is a relatively new type of coverage and matured to close to capacity. IFC is now one that ties to an objective parameter such as of the largest investors in microfinance, with about measurement of rainfall or temperature. Most $1 billion in commitments for its own account with pilot projects offered products directly to 160 microfinance institutions in 60 countries. low-income households. However, these projects struggled with a common set of challenges: FINANCIAL POLICY RESPONSE TO • High relative costs of operation, partly NATURAL DISASTERS because the average value per household The World Bank Group’s 10-year history of of the insured assets is very low. supporting pilot programs that provide weather • Basis risk, because the farmer’s actual risk is not index insurance in developing countries is a well correlated with the trigger except for payout. critical component to build resilience. Take-up • A lack of experience with, and trust in, the of weather index–based insurance products insurance product that may lead farmers to has been surprisingly low where it was offered place little value on insurance products. BOX 2.2. Weather Index Insurance in India and Mongolia IEG evaluations have documented two World Bank–supported index insurance projects operating at large scale in India and Mongolia that contributed to coverage of some risk for farmers and herders. The Weather Based Crop Insurance Scheme in India, which relies heavily on public subsidies, is by far the largest in the world. The program originated from a 2003 pilot in Andhra Pradesh that received World Bank technical assistance. Farmer participation is largely compulsory and is tied to credit access. More than 9 million farmers were enrolled as of 2010–11, but basis risk is still significant, and farmers who suffer a total crop loss will still have a 1 in 3 chance of receiving no payment from the program. In Mongolia, the World Bank designed an innovative livestock insurance to help reduce herders’ vulnerability to harsh winters, reflecting the realization that the loss of livestock during extremely cold winters was an important cause of poverty in Mongolia. After a request from the Bank of Mongolia, the World Bank invited a group of experts to discuss a possible insurance program. At that time, index insurance was well established for crops, but not for livestock. A workable design evolved from these discussions and was piloted as a component in a World Bank project. After a successful pilot program, the approach was scaled up to the country as a whole starting in 2009. The World Bank had a major role in obtaining political buy-in for the program. Currently, 15 percent of the herder population buys private insurance against loss of livestock in an extreme cold spell. The private insurance industry handles the program entirely, and the World Bank project essentially finances a reinsurance program. CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 17 Index insurance at the governmental level can be to provide rapid payouts after the event to help an effective means of financing social protection provide the liquidity needed to finance disaster programs. Local governments could buy weather response and early recovery phases—including insurance and use payouts to finance crisis relief. fuel purchases, equipment hire, and overtime The IEG climate adaptation report found that the wages.10 The facility is now self-sustaining and World Bank’s support for a weather derivative has made 12 payouts to eight member countries instrument in Malawi is an interesting example. ($35 million) as of May 2015—all less than three The derivative effectively functions as an insurance weeks after the triggering event. After the facility’s contract: a premium is paid up front, and then success, the World Bank had a key role in the government of Malawi receives a payout if developing the ongoing Pacific Catastrophe Risk predicted maize yields fall below a threshold level Assessment and Financing Initiative, a catastrophe because of drought. The World Bank acts as an insurance pilot covering the Cook Islands, the intermediary between Malawi and reinsurance Marshall Islands, Samoa, Tonga, and Vanuatu. companies and investment banks. The derivative ties into a social protection mechanism—in case Social Safety Net Policy of poor domestic harvests, the government uses Responses payouts to buy grain internationally, which it can Since the global food crisis, developing countries then distribute to drought-affected areas. and their international partners—especially the World Bank—have learned how to make social In the Caribbean, and later in the Pacific Islands, safety nets more responsive to systemic shocks. the World Bank was the driving force in establishing Because of this learning, as well as increased best practice pooled insurance programs that demand from client countries, the World Bank provide liquidity payments after natural disasters. has substantially increased its support. Lending The World Bank was a key architect of two for safety nets expanded about fourfold to about catastrophic insurance programs in an effort to $2 billion a year in FY09–16 compared with strengthen fiscal resilience to natural disaster– FY01–08. The objectives were to help countries related shocks. Caribbean and Pacific island design fiscally sustainable social safety nets countries are highly vulnerable to natural disasters, targeting the poor and vulnerable, ensure that especially hurricanes and flooding. Using a blend social transfers to the poor are funded in times of analytical and advisory work, financing, and of crisis through existing or new programs (such convening power, the World Bank had a central as conditional cash transfers), and to put in role in establishing the Caribbean Catastrophic place the knowledge, data, and administrative Risk Insurance Facility. The facility’s risk-pooling capacity needed to scale up and target social feature, the World Bank’s work to support risk safety nets effectively in the context of future modeling for the various countries, and the design economic, environmental, or health-related crises. of the financial setup helped overcome the market’s failure to provide cost-effective private insurance. There is also consensus within the humanitarian- The facility now has 16 member countries that pay development community on the need to move risk-based insurance premiums to buy desired away from discretionary assistance toward forms levels of insurance coverage. The facility is designed of social protection that are more predictable 18 INDEPENDENT EVALUATION GROUP and can be scaled up in times of crises. The assistance program, laid the groundwork for expanded portfolio of World Bank assistance an unprecedented government commitment to for social protection policies during drought in a social protection program. A pilot safety net the Horn of Africa is a positive development in project that simultaneously addressed the two this regard. The Productive Safety Net Program, most serious human development challenges implemented since 2006 in Ethiopia’s food- in Djibouti—malnutrition and unemployment— insecure regions, discussed in the next section, was launched in 2010, and additional financing illustrates how this type of program can help operations in 2012, 2014, and 2016 followed. The households bounce back after a food shock. series of operations, which combined nutrition and workfare activities targeting households with SOCIAL SAFETY NET POLICY pregnant women and young children, created RESPONSES TO THE FOOD CRISIS the foundation of a social safety net system. Limited knowledge constrained World Bank– Preliminary results from the impact evaluation supported social safety net responses to the global confirm the benefits of providing participants food crisis in several low-income countries. The with access to income through the workfare World Bank’s previous engagement or analytical program compared with nutrition activities alone. work in social protection was limited in many African countries that benefited from the GFRP SOCIAL SAFETY NET POLICY operations. This constrained the World Bank’s RESPONSES TO THE GLOBAL range of social safety net interventions that it could ECONOMIC CRISIS recommend and support. Most social safety net Many middle-income countries affected by the provisions supported by the GFRP consisted of global crisis found that poverty-targeted social in-kind transfers, notably school feeding programs safety nets were not flexible enough to increase and food-for-work programs through community- coverage or benefits as needed, and low-income driven development and social investment funds in countries lacked poverty data and systems to World Bank–financed projects. There was limited target and deliver benefits. Social safety nets to use of cash transfers and direct nutritional support address shocks received relatively less attention to young children and pregnant and breastfeeding until the crisis. Most countries enjoyed strong women—the most vulnerable to malnutrition. and stable economic growth during the previous decade. Social safety nets focused on addressing As part of the response, the World Bank Group the needs of the chronically poor or vulnerable and piloted interventions in Djibouti that could lay developing the human capital of the poor. Although the foundation for a more effective approach to these areas of support were relevant and important, future crises in low-income countries by targeting the World Bank and its borrowers did not focus on the nutrition of the most vulnerable groups. An developing flexible social safety nets appropriate impact evaluation of a pilot safety net in Djibouti for responding to systemic shocks. The food, confirms the benefits of combining workfare and fuel, and financial crises once again underscored nutrition activities. The World Bank’s 2008 Food lessons from previous crises. Countries that had Crisis Response Development Policy Grant, developed safety net programs or institutions during complemented by a medium-term technical CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 19 stable times could scale up better than those that effectiveness of these programs in protecting the had not, and the World Bank was better able to poor and vulnerable if well implemented. IEG help them. The two most common constraints for conducted a comprehensive review of the impact World Bank support were weak country institutions evaluation literature on social safety nets in 2011 and inadequate data. The lack of adequate and found that many safety net interventions, social safety net programs in many countries including conditional and unconditional cash led the World Bank to support instruments transfers and workfare programs, achieved their that were not designed for crisis response. primary objectives of raising households’ immediate consumption and income and reducing poverty. The World Bank was most effective in helping In some cases, they also enhanced households’ countries design effective social safety nets and ability to mitigate the negative effects of shocks. provide targeted social transfers where it had In Liberia during the food and financial crises, the steady engagement through lending, analytic and World Bank helped protect the poor and vulnerable advisory work, and dialogue for an extended period from the shocks through a public works program before the crisis. Such long-term engagement— and a program for vulnerable women and children. evident in Brazil, Colombia, Ethiopia, and Moldova, The public works program provided income for example—enabled countries to develop well- support to 17,000 vulnerable households. Based functioning social safety net institutions and the on the success of this program, the World Bank World Bank to develop a deeper understanding prepared a new project to scale up this intervention of country dynamics. This experience underlines to 49,500 beneficiaries. The program for vulnerable the importance of engaging during stable times women and children provided food support to to build social safety nets that can help countries 87 percent of its target population. respond effectively to shocks. Although the World Bank’s focus on systemic shocks has Well-designed safety net programs can be an accelerated since the 2008 crises, designing safety effective mechanism to help households cope nets (combined with other relevant programs) with food insecurity, as illustrated by the program that adequately address systemic shocks needs implemented in drought-prone regions in Ethiopia. greater attention. Because shocks are transitory The Productive Safety Net Program (PSNP) is in nature, an important characteristic is the one of Sub-Saharan Africa’s largest, which the ability to expand and contract to reach different World Bank supported with a series of adaptable population groups as needed. Access to reliable program loans during 2005–16 as part of a poverty data, crisis monitoring systems, and consortium of donors. PSNP targets chronically flexible targeting systems are important elements food-insecure rural households in drought-prone to develop appropriate social safety nets. highlands and in pastoral lowlands to reduce their vulnerability. The program contributed to improved The evaluative evidence suggests that it is possible food security in all Regions, helped rehabilitate the to design and implement effective social safety net environment and natural resources, and improved programs to protect the poor and vulnerable access to education and health care. An impact against shocks even in the poorest countries. evaluation concluded that the PSNP has protected Impact evaluations show the short-term poor households from the negative effects of 20 INDEPENDENT EVALUATION GROUP CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 21 shocks. A contingency budget and risk financing coordinated way. It also recognizes that seasonal mechanism were added to the PSNP (and more and cross-border mobility is a crucial feature recently to the Hunger Safety Net Program in of pastoral livelihoods and coping mechanisms Kenya) to allow for scale-up during crises, including during droughts and conflicts, focusing on the to households that do not receive assistance in regional dimensions of strengthening access to normal times. However, social protection programs resources and markets as well as disease control, initially designed for agrarian settings do not easily fodder production, and early warning systems. fit with highly vulnerable groups in the pastoral context because of a lack of infrastructure and Environmental Policy considerably different social dynamics that could Responses to Natural Disasters impede targeting and benefits allocation. Regarding Exposure to disaster risks is rapidly increasing pastoral populations, innovations such as the use around the world, and many regions are of technology (smartcards and mobile payments) experiencing greater damage and higher losses to deliver transfers that are not geographically tied than in the past. Economic and human losses will to distribution points can increase the reach of inevitably continue to increase unless resilience to social protection programs to mobile populations. natural disasters is built that enables community This is especially critical for the chronically ill, the social and economic systems to reduce the elderly, pregnant women, and nursing mothers. impact and recover from shocks. These losses put sustainable economic and social development Effective resilience building for pastoral communities at risk. Annual total damage from environmental vulnerable to drought needs to focus on household- disasters increased tenfold between 1976–85 level needs and recognize mobility. IEG’s evaluation and 2005–14, from $14 billion to more than of the Pastoral Development Community projects in $140 billion. Average population affected each Ethiopia highlighted a need to differentiate between year rose from about 60 million people during pastoral areas and people requiring urgent access 1976–85 to more than 170 million during 2005–14. to life-sustaining services. In a highly food-insecure Several factors influence disaster risk: hazard, environment, emphasis in the short term should exposure, and vulnerability. A hazard is the be on resilience at the household level through occurrence of a potentially dangerous naturally activities such as restocking, emergency feeding occurring event, such as earthquakes or tropical and watering of livestock, or rangeland reseeding. cyclones. Exposure relates to the population In the medium to long term, IEG noted that projects and economic assets located in hazard-prone like the regional pastoralism project in the Horn areas. Vulnerability is the susceptibility of the of Africa had an improved design over previous exposed elements to the natural hazard. Climate pastoral projects. The regional program is designed change and increased exposure drive changes to focus on the resilience of communities living in in hazard. Exposure increases with population drought-prone areas while building the capacity growth in hazardous areas and when improved of national and regional institutions to respond to socioeconomic conditions raise the value of assets. weather-induced emergencies in an effective and 22 INDEPENDENT EVALUATION GROUP BUILDING RESILIENCE INTO DISASTER have been safety nets or microinsurance for RESPONSE PROJECTS agriculture or drought-oriented projects. The increasing impact of natural disasters Effective partnerships and coordination of requires new thinking, approaches, and scale to international and local relief and development build resilience into World Bank Group disaster agencies is a key to effective disaster response. response projects. An important catalyst in This applies to all development assistance, but this direction was the contribution of the 2006 particularly after natural disasters when agencies IEG evaluation of the World Bank’s response to are generally concerned with their visibility in the natural disasters, which was influential in giving disaster relief effort, often to use it for fund raising. impetus to the creation of the GFDRR as the main For example, an IEG evaluation found that in the window of World Bank assistance on disaster risk aftermath of the tsunami in the Indonesian province management and resilience. Important changes of Aceh, about 10 agencies were providing new have also been observed in the World Bank housing, each constructing houses to different Group’s response to natural disasters, including standards and sizes. Not surprisingly, potential a 2011 IEG study that compared 90 disaster beneficiaries held off accepting new home investment projects during 2008–10 to a set of proposals in the hope of securing a better and 528 disaster projects during 1984–2007. The larger home from another agency. The evidence study found that although the response to earlier suggests that the World Bank was increasingly disasters had been reactive and tactical instead of willing to collaborate and fit into an overall approach proactive and strategic in the support it provided to post-disaster rehabilitation. For example, in the between 2008 and 2010, the World Bank Group Pacific Islands, the small states CCPE points out had shown flexibility and effective coordination that numerous donors were willing to support the in disaster responses. During this later period, rehabilitation of infrastructure after cyclones in World Bank disaster projects also made a clear Samoa and Tonga, but they were reluctant to fund shift toward risk reduction. The study found a the repair and replacement of private housing, so significant increase in the number of projects the World Bank agreed to provide funds for this supporting disaster risk reduction activities—from purpose. Similarly, the evidence suggests that about 25 percent to 40 percent—but it was still a effective collaboration with local governments minority of projects. Evaluative evidence shows and nongovernmental organizations is essential significant mainstreaming of disaster risk reduction for an effective response. A November 2010 IEG into projects whose development objective is not review of past World Bank experience that sought disaster reduction. This is mostly through drainage to guide its response to severe flooding in West and flood protection in water sector projects that Africa cited the evaluation finding that rebuilding focus on water supply and sanitation or through social structures was a significant challenge and irrigation, drainage, or other works integrated into had generally not been done well. However, it was agriculture and rural development projects. Most even more difficult if the natural disaster response exposure reduction and resettlement has been ignored local institutions and caused the victims in urban water projects, most warning systems to depend on external emergency assistance. have been for cyclone or flood-related projects, and most financial risk management mechanisms CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 23 ADAPTING TO CLIMATE CHANGE sought to draw lessons from World Bank Group Support for country measures to reduce the impact experience with both forms of adaptation. of climate change and to adapt to it became a The evaluation identified several challenges that the significant and growing share of the World Bank World Bank faces in its engagement with countries Group’s programs during the past decade. IEG on climate change adaptation. Despite numerous evaluated climate change support and found innovative approaches, the World Bank still lacked that attention within the World Bank Group to all sufficient instruments to help countries more fully aspects of climate change, including adaptation, manage risks of catastrophic losses. Although the had increased substantially after the World Bank World Bank had shifted its emphasis from natural issued Development and Climate Change: A disaster relief to disaster risk reduction in recent Strategic Framework for the World Bank Group, years, such efforts tended to face physical and Completion Report FY09–11. This increase was financial sustainability problems. The evaluation reflected in, among others, the publication of World also found that World Bank Group–supported Development Report 2010: Development and infrastructure projects were often subject to climate Climate Change, an upsurge of climate change- risks (particularly earthquakes and flooding), but related analytical work (including on the economics the World Bank Group lacked procedures for of adaptation), and greater funding for integrated identifying and mitigating such risks. Furthermore, national-level investment plans. Climate change the evaluation noted that climate models had also had much higher visibility in World Bank proved less useful than desirable in identifying Regional and country strategies. The World Bank adaptation alternatives, “suggesting the need for Group announced in 2015 that it would increase more attention to decision making under extreme climate financing further to increase global efforts uncertainty.” A particularly challenging area is the to help countries tackle the impacts of climate long-term impact of projects to increase agricultural change and move toward low-carbon growth. productivity in areas of rain-fed agriculture. The IEG conducted a three-phase evaluation of the evaluation found both climate variability and World Bank’s support for countries in dealing with poverty tended to be acute in such areas, and climate change and identified several challenges. sustainable land and watershed management The first two phases focused on various aspects projects appear to have enhanced local incomes, of climate change mitigation. The third phase but their presumed long-term resilience benefits focused on climate change adaptation and still needed verification. For example, there distinguishes between adaptation to climate were cases in which inappropriate afforestation variability—citing floods, storms, and droughts had also resulted in depleted groundwater. as examples and referring to this as “an old and The evaluation concludes the World Bank lacked unfinished agenda”—and adaptation to climate a “comprehensive, outcome-oriented framework” change, which includes “wholly new challenges.” to help guide, monitor, and evaluate the adaptation However, it recognizes that climate change has interventions it supported. It recommended that led to both the intensification of climate variability the existing results framework be “revamped” to and new problems, such as sea level rise, and 24 INDEPENDENT EVALUATION GROUP better track resilience outcomes and enhance World Bank engagement has covered three learning from experience. In this connection, broad areas: reducing disaster risks by it also recommended that the World Bank increasing infrastructure resilience, enhancing develop operational guidelines for screening capacity and preparedness (including financial projects regarding climate risk and devoting preparedness), and supporting policy reform. The greater attention to determining how to promote following are among the principal findings of this land uses that are more resilient. Evidence evaluation regarding environmental resilience: shows that the World Bank adopted many of • Successive World Bank projects in infrastructure these recommendations, particularly regarding have helped to establish more disaster-resistant screening new investment projects for climate standards and have funded risk reduction risk as part of the 16th Replenishment of IDA infrastructure such as seawalls and dikes. commitments, giving greater attention to climate- • The programs have included a range of activities proofing new infrastructure projects and seeking aimed at enhancing preparedness and risk to integrate climate change adaptation measures management capacity, with mixed results. into its landscape management operations. Early warning systems seemed to have high value, though some disasters provide little Furthermore, the World Bank is piloting holistic opportunity for advanced warning. Planning resilience building approaches such as the City processes have rarely used hazard maps Strength Program, with promising results. or other analytic work. Although technical training has led to some improvements in data management, high personnel turnover STRENGTHENING ENVIRONMENTAL has limited its long-term impact. RESILIENCE IN SMALL STATES • World Bank–supported programs also sought to Small states, most of which are also islands, are bring a stronger resilience focus to government particularly vulnerable to acute environmental planning processes and to better integrate shocks. Many of these states are in areas exposed climate change–related concerns, with mixed to extreme weather events, such as cyclones and results. For example, significant progress was hurricanes. Small islands are also exposed to the observed in raising finance ministers’ awareness impacts of climate change, especially rising sea of disaster risk and the ability to manage its fiscal implications, but other tangible policy changes levels. IEG examined World Bank support for were relatively few, and World Bank efforts to shift responding and helping to build resilience to the land use policy had limited effectiveness mostly full range of environmental shocks (including because of opposition to zoning regulations from climate change) in two regional small state groups the tourism industry and private landowners. —the six countries in the Organisation of Eastern Some building codes were approved, but private Caribbean States (OECS) and nine Pacific Island sector compliance with them is still weak. countries— as part of a recent cluster country The World Bank’s engagement in small states program evaluation. shows a need for a long-term involvement that Disaster risk management has been a core focuses on helping countries to proactively part of World Bank engagement in both the anticipate and prepare for extreme weather OECS and the Pacific Island country programs. events—for example, through building and CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 25 maintaining the regional and national institutional support through policies and analytical work, capacity needed to do so. IEG’s evaluation mobilizing donor finance, and preparing and concluded, “The approach to disaster risk implementing a Global Program for Avian Influenza management of directly supporting resilience Control and Human Pandemic Preparedness and building (in small states) was helpful, but had Response (GPAI). Under the GPAI, the World Bank limits.” It added, “Making real improvements in financed 83 operations across 63 countries that vulnerability requires continuing efforts to foster addressed avian influenza, zoonotic diseases, wholesale changes in public and private incentives or pandemic preparedness or response. The and behavior, and the long-term risks of climate GPAI was the first global investment program change (including helping countries access supported by the World Bank, and it adopted climate financing) need to be addressed.” two key innovations: a project design template and an expedited approval process. The rapid Multipronged Policy Responses preparation may have led to some weaknesses to Pandemics in quality at entry, and the projects were not Any communicable disease can become a prepared any faster than those for other emergency pandemic if it spreads rapidly across countries and interventions. However, the template system puts poor countries and poor communities at risk allowed the World Bank to prepare a large number of falling deeper into poverty.11 The World Bank of emergency projects in a relatively short period has actively supported global efforts to contain in an area in which it lacked prior experience. pandemics such as avian influenza and the Ebola Inherent tensions existed between use of an virus in recent years. Both the avian influenza and emergency instrument with a short project life Ebola pandemics were successfully contained, and attempts to build long-term capacity through which speaks to the efficacy of the international complex civil works and institutional change. effort. The implications of most pandemics go Despite shortcomings, the partnership’s beyond the health system. They often require effectiveness in combatting avian influenza hinged an integrated approach from different ministries on effective collaboration across disciplines and and agencies (for example, animal health and agencies. Cooperation and coordination across human health in the case of avian influenza), sectors within the World Bank and in country behavior changes, integration of national-level agencies at the strategic level was significant. programs and policies with local implementing However, cooperation sometimes broke down agencies, integration of the actions of multiple at the project implementation level partly because donors, and integration of public, private, and of a lack of incentives for intersectoral collaboration nongovernmental organization activities. within the World Bank. Little operational learning IEG drew lessons from evaluations of the and knowledge sharing occurred among World Bank’s response to the avian influenza World Bank staff across projects during epidemic that can be applied to other pandemics. implementation except in Regions where some The findings showed that the World Bank, staff worked on multiple projects. At the country in partnerships with governments and other level, animal health agencies often showed higher international agencies, moved rapidly to provide commitment and interest than human health 26 INDEPENDENT EVALUATION GROUP agencies partly because they saw avian influenza other agency had the capacity to finance and as central to their core business. The World Bank manage investment projects at the scale needed. lacked specific experience and technical expertise Organizational and operational coordination in animal health and pandemic preparedness, so it challenges sometimes led to implementation worked closely with other international agencies, delays, but the overall level of cooperation between particularly the World Organisation for Animal the World Bank and international agencies was Health, the Food and Agriculture Organization unprecedented, and participants viewed the (FAO), and the World Health Organization (WHO). partnership as successful. The World Bank had a The World Bank provided financing, project key role in motivating agencies to work together and supervision, and coordination at the country and helping governments recognize the need for action. global levels while other agencies provided primarily In some countries, it was not possible to secure technical support, including significant operational sufficient supplies of quality seeds because support from FAO and WHO. Some tensions either the local seed industry was not yet existed between the World Bank and some staff adequately advanced (Ethiopia and Nicaragua) in technical agencies regarding this division of or timely imports could not be arranged. responsibility, but it is difficult to imagine an alternative to World Bank leadership because no CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 27 1 In some countries, it was not possible to secure sufficient 7 The government had followed a procyclical policy in supplies of quality seeds because either the local seed 2006–08 when commodity prices hit record levels, which industry was not yet adequately advanced (Ethiopia and had unfortunate consequences when the prices collapsed. Nicaragua) or timely imports could not be arranged. During the crisis, the government attempted a fiscal adjustment supported by the World Bank’s DPOs and 2 About two-thirds of the 67 DPOs and almost all the technical assistance. However, the government’s reform countries in the high fiscal stress zone included spending- effort lost momentum when copper prices recovered rapidly, related measures. and the newly adopted fiscal reform laws were not fully implemented and budgeting shifted back to a procyclical 3 Less than one-third of the crisis response DPOs included pattern. Therefore, the World Bank’s support to design the specific targets for the fiscal deficit, fiscal revenues and legislation and the sovereign wealth fund did not bring any expenditures, or the public debt ratio. tangible results. 4 About half of the crisis response DPOs with fiscal content 8 Sixteen financial intermediary loans were approved in 11 supported measures to protect or scale up expenditures on countries between June 2008 and June 2010, amounting social safety net programs. to $3.8 billion—a significant 31 percent of total World Bank 5 For example, 88 percent of the 67 crisis response DPOs financial sector commitments. with fiscal content contained measures to improve budget 9 These include the large infrastructure lines of credit in planning, execution, comprehensiveness, and transparency. Bangladesh and India, the small and medium enterprises 6 The World Bank contributed to these outcomes through loan to the Arab Republic of Egypt, the Scaling-Up policy dialogue, direct budget support, and a large amount Microfinance loan to India, and the Bosnia and Herzegovina of analytical work. A 2009 DPO used the window of small and medium enterprises access project. opportunity during the global financial crisis and the resulting 10 The facility offers members three distinct insurance drop in oil prices to help accelerate reforms promoting fiscal products: coverage against a hurricane of specified wind sustainability. Apart from specific achievements such as a speed, against an earthquake of a specified magnitude, reduction in subsidies to the real sector (while protecting and (most recently) against rainfall of specified severity. social spending) and rationalization of the use of oil-related savings, the development policy loan helped strengthen 11 The internationally accepted definition of a pandemic in the resilience by supporting the commitment to responsible Dictionary of Epidemiology is straightforward: “An epidemic public resource management, which continued after occurring worldwide, or over a very wide area, crossing the crisis. international boundaries and usually affecting a large number of people.” 28 INDEPENDENT EVALUATION GROUP 3 What Lessons Emerge from the Evaluations? There has been significant learning in several lending operations in place expediently when the areas on how to best support crisis response. In need arose. However, IEG evaluations noted several particular, the World Bank Group is shaping its gaps or weak areas in World Bank ASA that need advice on social safety net design to the special addressed. The crisis response evaluation found needs of crisis response in general and to specific cases in which the ASA and related diagnostic types of crises. Furthermore, the World Bank and work underpinning operations in the financial IFC have introduced a range of new instruments sector appeared insufficient, including in to support a more rapid and targeted response countries with financial sector DPOs. The DPO to crises. However, IEG conducted evaluations program objectives in those cases were vague shortly after the crisis in several cases and therefore and overambitious rather than specific and was unable to assess the medium- and long-term carefully articulated. This lack of effective ASA impacts of the World Bank’s support. It would be also constrained the design of appropriate social useful to revisit some of these evaluations given safety net responses to both the food price the importance of understanding these impacts. crisis and the global economic crisis. Similar observations apply in cases of country-specific Lessons from World Bank terms of trade shocks. The Zambia Country Group Intervention Modalities Program Evaluation found that the World Bank n Preparatory analytic work increases the did not consider the implications of alternative likelihood of effective crisis support, but gaps copper price scenarios for the country’s economic exist in some areas. Advisory services and management even though this was clearly the analysis (ASA) at the country level was an important fundamental risk facing the country at the time. part of the World Bank’s response to the global n Budget support through DPOs has been a crisis. High-quality analytic work was a common dominant and indispensable part of World Bank thread in many of the successful interventions. responses to shocks, but DPOs require Country programs with solid ASA portfolios had follow-up for effective long-term resilience the foundation in knowledge and relationships with building. The DPO has been the workhorse of the the authorities necessary to put well-designed CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 29 World Bank’s support for responses to shocks to the cost of borrowing (this is atypical among because it can be implemented relatively quickly DDOs). In many other cases that did not specify and provides fungible budget support to such triggers, drawdown was virtually immediate, governments. However, because they lack and there were few benefits in increasing credibility follow-up actions and do not track progress over and providing market reassurance. This experience time, stand-alone crisis response DPOs were not suggests that the DDO mechanism design could well suited to follow up on the sustained reform warrant a second look to optimize its effectiveness agendas that were crucial to building medium-term in crisis response. In the Guatemala CAT DDO, resilience. Follow-up requires a continuous flow of exercising the drawdown option almost immediately analytical work, a series of programmatic DPOs appeared to reduce government incentives to with appropriate fiscal structural reform content, or complete the policy and institutional reforms both. Similar tensions have been observed with envisioned under the loan, to the detriment of environmental DPOs. IEG evaluation work suggests long-term environmental resilience building. this type of lending can be effective when the n Using financial intermediary loans for crisis principal barriers to improving environmental response appears to offer limited benefits. outcomes are policy issues instead of poor World Bank FILs prepared in the wake of the institutional capacity or other constraints. However, global crisis sought to ease borrowing constraints other than offering fast-disbursing budget support on the private sector because of lack of liquidity in the aftermath of a shock, environmental DPOs in commercial banks. IEG evaluation work used for crisis response typically make little suggests that FILs have major limitations as a contribution to the areas of environmental crisis response instrument. Many FILs did not resilience building that require sustained policy disburse to the most affected firms or quickly reform over time. enough help much in crisis recovery. FILs to n The DDO and Catastrophic Deferred institutions with prior FIL experience, repeat FILs, Drawdown Option (CAT DDO) instruments and FILs directed to exporters appear to have appear to be the most effective in strengthening provided timely support to affected segments resilience when drawdown is genuinely in some cases. However, FILs directed at new deferred. A DDO allows the borrowing country entities and at infrastructure appear particularly to defer drawing down DPO funds, and a CAT unsuited to scaling up for crisis response. DDO formally links the drawdown of funds to n Global programs can have valuable roles in the occurrence of a natural disaster. Evaluative improving the effectiveness of crisis response evidence on the effectiveness of the DDO and CAT and strengthening resilience. They have variously DDO is mixed. Some DPOs with DDO features used helped facilitate and streamline responses to during the global crisis increased market confidence crises, strengthen long-term resilience, and in the country’s capacity to navigate the crisis, avoid inevitable delays associated with collecting which helped prevent capital flight and maintained funds once shocks materialize. Three notable or restored access to borrowing at reasonable programs addressed the food price crisis, the costs. This was notably true in Indonesia, where avian influenza pandemic, and natural disasters. the DDO had formal contingent triggers related 30 INDEPENDENT EVALUATION GROUP The 2008 GFRP provided a menu of fast- risk reduction] to a new level of operationalization” track interventions to process as emergency within the World Bank by systematically focusing projects and set aside an associated funding on ex ante risk reduction. The evaluation did not envelope. The GFRP enabled resource transfers examine the contributions of specific GFDRR- to vulnerable countries (notably in Africa), supported interventions in strengthening country though the amounts received were modest in resilience to natural disasters as such. However, most cases. A lack of prior analytical work and it did observe that the facility had an important, institutional weaknesses in affected countries positive impact by improving the integration constrained the efficacy of responses in many of disaster risk reduction concerns into more cases. However, the GFRP helped reposition the recent World Bank Group country assistance World Bank as a key player in agriculture and strategies and helped to enhance the quality food security matters and build experience for of pertinent World Bank analytical work. broader institutional crisis response mechanisms n IFC can help mitigate disruptions in private Similarly, in response to the avian influenza sector access to financing after systemic pandemic, the GPAI’s program framework shocks, but it has faced delivery challenges. document set out a common approach for projects IFC responded to the global crisis by implementing responding to the pandemic. The framework or adapting several innovative platforms targeting provided a useful way to establish support for trade finance, bank capitalization, distressed assets a global response to avian influenza involving a management, infrastructure, and microfinance. large array of development partners. It outlined However, implementation delays lessened the activities that the World Bank would support, impact of these initiatives, which in several cases ensuring that projects contained the necessary were too small to have systemic influence. Still, core activities while enabling countries, with there were some beneficial effects. In particular, World Bank and technical agency assistance, IFC’s Microfinance Enhancement Fund helped instill to choose specific activities that met their confidence in the availability of rollover financing national priorities. The program framework to microfinance institutions, contributing to the template included animal health, human restoration of stability in microfinance lending health, and public awareness and information after the global crisis. In trade financing, although components, and nearly all of the stand-alone program targets were not met initially, the IFC facility avian influenza projects adopted this structure. provided funding for trade finance in individual client banks once obstacles were overcome. Regarding natural disasters, the Global Facility for Disaster Reduction and Recovery was established in September 2006 to mainstream Lessons from International disaster reduction and climate change adaptation Responses to Crises n Governments, local institutions, and in country development strategies and to foster populations must own crisis response. and strengthen global and regional cooperation This seems obvious, but a surprising number of among various stakeholders. IEG’s evaluation work evaluations cite lack of ownership as the reason observed that the GFDRR had “elevated [disaster for the lack of success of World Bank–supported CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 31 interventions. They also note lack of consultation Lessons from the World Bank and failure to involve stakeholders in the planning, Group’s Approach, Internal design, and implementation of crisis response Coordination, and Work Quality operations. n The World Bank has attempted to grasp the synergies of a multisector approach to n Effective donor coordination is even more resilience in most instances, and it should work important in the context of crises than in with its international development partners to noncrisis periods. The aftermath of a crisis is often continue emphasizing the need for a holistic a chaotic scene of nongovernmental organizations, approach to resilience and crisis management bilateral donors, and international bodies operating instead of a narrower sector-by-sector without coordination. Scope exists for an approach, particularly in small states. The international effort to consider how best to handle World Bank Group displayed a multisector the immediate aftermath of crises and propose approach to strengthening resilience in countries solutions. Pandemics seem better served by WHO’s covered through IEG’s recent cluster country clear central role and fewer nongovernmental program evaluations, including Kazakhstan and organizations in the field. But natural disasters Mongolia, and in the OECS and Pacific Island tend to lack a clear model for how to proceed. states. The crisis response evaluation noted that many DPOs initiated by the World Bank in the aftermath of the global financial crisis addressed 32 INDEPENDENT EVALUATION GROUP more than one dimension of resilience, especially in a weakness of the World Bank’s crisis response. the financial sector and in fiscal policy. Supporting IEG’s 2011 natural disaster Briefing Note states, measures to improve financial, fiscal, and social “By their nature, emergency recovery and resilience simultaneously is highly relevant given reconstruction projects and programs are likely to that financial and fiscal imbalances usually interact be prepared under considerable time pressure, and can exacerbate each other, often with adverse but this haste should not lead to a reduction in social impacts. Banking crises can trigger debt systems to ensure accountability and transparency, crises as governments strive to recapitalize particularly because they may disburse large sums distressed banks, and debt crises can stress bank in a short time period.” In the Sri Lanka Tsunami balance sheets if banks suffer significant losses Emergency Recovery Loan, the Implementation on their holdings of government debt and if a loss Completion and Results Report Review (ICRR) of confidence triggers withdrawals of deposits. drew the lesson that in disaster recovery projects, a Therefore, simultaneously addressing financial and comprehensive and institutionalized monitoring and fiscal vulnerabilities can be mutually reinforcing evaluation system is crucial for enabling informed by reducing the likelihood that financial and fiscal decision making for policy and operations. The stress aggravate each other. A natural disaster counterargument is that such systems could further compounds all of these impacts further, similarly overstrain the limited capacity the government underscoring the need to work on the various has in place to manage the crisis. This is too dimensions to enhance countries’ resilience. simplistic. The World Bank needs to devise and set up monitoring frameworks that do not impose n The growing World Bank operational portfolio a major burden on project implementation yet in resilience deserves a greater degree of ensure a basic measure of accountability. Innovative internal coordination. Because almost every approaches could help in this regard, such as World Bank global practice is involved in work use of geospatial data and mobile phone data. on one or more dimensions of resilience, the World Bank needs to ensure knowledge sharing n The World Bank should use crises as an across global practices and a concerted approach opportunity to build long-term resilience, and to identifying and filling knowledge gaps. Several client ownership is an essential ingredient. IEG evaluations noted weaknesses in internal Addressing underlying structural issues under crisis coordination, in some cases even identifying these conditions is inherently difficult and can succeed as a cause of failure to achieve results in the field. only when there is careful preparation and a clear The World Bank Group could consider initiatives to understanding among country stakeholders of the enable more effective coordination and knowledge need for the changes. Advice on the subject in sharing in this area. IEG evaluations is conflicted. Thematic evaluations tend to argue that the World Bank has not taken n A rapid and flexible crisis response is enough advantage of its operations during crises to important, but speed should not take priority build long-term policies and capacity. Conversely, over developing appropriate accountability and ICRRs of crisis response operations frequently monitoring frameworks. IEG has consistently note a lack of progress or success in components highlighted the lack of appropriate monitoring as supporting long-term policies or capacity building CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 33 attributable to dissipating ownership when crisis Also, policy choices and international support conditions subside. There is no simple answer. have not paid adequate attention to the trade-offs Making the best use of crisis response to between measures addressing the immediate launch sustainable long-term resilience building effects of shocks and those laying the basis for requires careful contextual and political economy long-term resilience. Relatedly, there is insufficient analysis to determine what is appropriate. understanding of country conditions under which crises were instrumental in pushing governments to Areas Where More act on, and rally public support for, strengthening Knowledge Is Needed long-term resilience, and those under which long- Little is known about the benefits of focused term resilience considerations were subordinated interventions on individual resilience dimensions to the imperative of the crisis response. It would versus comprehensive approaches that incorporate be useful to keep monitoring the international all dimensions of resilience. During times of crisis, community’s resilience interventions and individual the reactive response of policy makers and the country responses to see the extent to which they affected population is unsurprisingly to address have continued the shift toward upstream work the impact and specific causes of the crisis at and a focus on vulnerability reduction. Specifically, hand. However, this tunnel vision effect or silo it would be useful to assess the extent to which approach misses the opportunity to build resilience the international community has contributed to in a comprehensive and more durable manner. building up social protection mechanisms that can be scaled up and targeted to the poor and vulnerable in response to systemic shocks. 34 INDEPENDENT EVALUATION GROUP Bibliography Gaarder, M., L. Kelly, and S. Wegner. 2017. A Contribution to the World Bank Group’s Food Security Response. Washington, DC: World Bank. GFDRR (Global Facility for Disaster Risk Reduction). 2016. 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Washington, DC: World Bank. 36 INDEPENDENT EVALUATION GROUP PHOTO CREDITS: Cover: © Andrea Borgarello / The World Bank Group Page 2: Thor Jorgen Udvang / Shutterstock Page 5: Salahaldeen Nadir / World Bank Page 8: hxdbzxy / Shutterstock Page 11: JMiks / Shutterstock Page 21: © Scott Wallace / World Bank Page 27: Simone D. McCourtie / World Bank Page 32: Nugroho Nurdikiawan Sunjoyo / World Bank CRISIS RESPONSE AND RESILIENCE TO SYSTEMIC SHOCKS 37 The World Bank 1818 H Street NW Washington, DC 20433