58112 PHASE 1 The World Bank Group's Response to the Global Economic Crisis The World Bank Group WORKING FOR A WORLD FREE OF POVERTY T he World Bank Group consists of five institutions-- the International Bank for Reconstruction and De- velopment (IBRD), the International Finance Corporation (IFC), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of Invest- ment Disputes (ICSID). Its mission is to fight poverty for lasting results and to help people help themselves and their environment by providing resources, sharing knowl- edge, building capacity, and forging partnerships in the public and private sectors. The Independent Evaluation Group IMPROVING DEVELOPMENT RESULTS THROUGH EXCELLENCE IN EVALUATION T he Independent Evaluation Group (IEG) is an indepen- dent, three-part unit within the World Bank Group. IEG-World Bank is charged with evaluating the activities of the IBRD (The World Bank) and IDA, IEG-IFC focuses on assessment of IFC's work toward private sector develop- ment, and IEG-MIGA evaluates the contributions of MIGA guarantee projects and services. IEG reports directly to the Bank's Board of Directors through the Director-General, Evaluation. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank Group's work, and to provide accountability in the achievement of its objectives. It also improves Bank Group work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. T h e W o r l d B a n k G r o u p 's Response to the Global Economic Crisis --PHASE 1-- 2011 The World Bank Washington, D.C. ©2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 14 13 12 11 This volume, except for the "Management Response" and the "Chairperson's Comments," is a product of the staff of the Independent Evaluation Group of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank and IFC or the governments they represent. This volume does not support any general inferences beyond the scope of the evaluation, including any inferences about the World Bank Group's past, current, or prospective overall performance. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: Child eating porridge from food bank, Lukula, Tanzania. Photo courtest of Gideon Mendel/Corbis. ISBN: 978-0-8213-8665-1 eISBN: 978-0-8213-8666-8 DOI: 10.1596/978-0-8213-8665-1 Library of Congress Cataloging-in-Publication data have been applied for. World Bank InfoShop Independent Evaluation Group E-mail: pic@worldbank.org Communications, Learning, and Strategy Telephone: 202-458-5454 E-mail: ieg@worldbank.org Facsimile: 202-522-1500 Telephone: 202-458-4497 Facsimile: 202-522-3125 Printed on Recycled Paper ii | Gender and Development Table of Contents Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viii Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x Management Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xxi Chairperson's Comments: Committee on Development Effectiveness (CODE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxix 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Evaluation Issues and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2. The Global Crisis and Its Impact on Developing Countries . . . . . . . . . . . . . . . . 8 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Globalization of the U.S. Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Impact of the Crisis on Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Social Impact of the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Fiscal and Debt Dynamics: Before and After the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Comparison with Previous Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3. The World Bank Group's Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 World Bank Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 IFC Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 MIGA Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4. Assessment of the World Bank Group Response. . . . . . . . . . . . . . . . . . . . . . . . . 46 Assessment of World Bank Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Assessment of the IFC Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Assessment of MIGA's Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 5. Lessons and Issues for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Lessons from Past Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Emerging Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Issues Going Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Appendix A: Evaluation Methodology | iii Statistical Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 Photographs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 Boxes 3.1 Special Thematic Crisis Response Initiatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3.2 Velocity of Disbursements: Comparison of DPOs and Investment Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.3 Portfolio of AAA to Inform Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.4 IBRD Capital Adequacy: Evolution of Development Committee Views . . . . 31 3.5 What Low-Income Countries Say about the Bank's Crisis Performance . . . . 33 3.6 Examples of Projects Originated through the IFC Crisis Initiatives . . . . . . . . . 36 3.7 Examples of IFC's Crisis-Period Interventions in IDA and non-IDA Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.1 Case Study Countries: Crisis Severity and World Bank and IMF Financial Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.2 Mexico: A Substantial Crisis Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 4.3 Indonesia: Bank Support through Contingency Financing . . . . . . . . . . . . . . . . 50 4.4 India: Comprehensive Crisis Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.5 Hungary: Delayed Attempt to Support a Graduated Country . . . . . . . . . . . . . 52 4.6 Georgia: Bank Readiness and Leadership in a Post-Conflict Situation . . . . . . 53 4.7 Turkey: Adaptation of an Existing Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 4.8 Georgia: A Systemic Crisis Response by IFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Figures 2.1 Crisis Chronology, 2007­10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2 Private Capital Flows, 2006­10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.1 IBRD/IFC Financing to Developing Countries, Fiscal Years 1990­2010 . . . . . 19 3.2 World Bank Commitments and Disbursements: The Long View . . . . . . . . . . . 20 3.3 The Evolving Forecast for 2009: The Bank and Others . . . . . . . . . . . . . . . . . . . . . 29 3.4 Impact of Crises on Bank-Fund Collaboration in LICs and MICs . . . . . . . . . . . . 33 3.5 Implementation of IFC's Global Crisis Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.6 IFC Investment Commitments, Fiscal Years 2005­10 . . . . . . . . . . . . . . . . . . . . . . 39 3.7 Net IFC Commitments by Region, Fiscal Years 2008­10 . . . . . . . . . . . . . . . . . . . 40 3.8 Net IFC Commitments by IDA Status, Fiscal Years 2006­10 . . . . . . . . . . . . . . . . 40 3.9 IFC Instrument Mix, Fiscal Years 2008­10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.10 Net IFC Commitments by Industry Cluster, Fiscal Years 2008­10 . . . . . . . . . . 43 iv | The World Bank Group's Response to the Global Economic Crisis 3.11 MIGA: Volume of Guarantees Issued by Region, Fiscal Years 2008­10 . . . . . . 44 4.1 Changes in Net IFC Commitments and Net Private Investment by Income Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.2 Productivity of IFC Investment Staff, Fiscal Years 2008­10 . . . . . . . . . . . . . . . . . 64 4.3 IFC Financing Projections, 2009­13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.4 Additionality and Development Outcomes of IFC Investment Operations in Past Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Tables 2.1 Growth Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.2 Poverty in Developing Countries, Alternative Scenarios, 2005­20 . . . . . . . . . 13 2.3 General Government Gross Debt by Country Group . . . . . . . . . . . . . . . . . . . . . . 13 2.4 General Government Balance by Country Group . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.1 World Bank Group Commitments, Fiscal Years 2008­10 . . . . . . . . . . . . . . . . . . 19 3.2 IFI Financial Flows, Fiscal Years 2009­10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.3 Regional Shares of Bank Lending Commitments and Disbursements . . . . . 21 3.4 World Bank Operational Productivity for New Lending . . . . . . . . . . . . . . . . . . . . 31 3.5 IFC's Crisis Initiatives: Funding and Deployment . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.6 Staff Mix in IFC Investment Operations, 2008­10 . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.7 Countries with Largest Net Commitment Changes by IDA Status . . . . . . . . . 41 3.8 Changes in Net IFC Commitments by Subsector. . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.9 MIGA Projects and Guarantee Volume, Fiscal Years 2008­10. . . . . . . . . . . . . . . 43 3.10 MIGA: Volume of Guarantees Issued by Sector, Fiscal Years 2008­10. . . . . . . 43 4.1 Selected Development Policy Operations Approved in Fiscal Years 2009­10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4.2 Net IFC Commitments and Net Private Investment Relative to Changes in Country Risk Perceptions, 2008­09 . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 4.3 Changes in Private Investments of Multilateral Development Banks, 2007­09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 4.4 Private Sector Deals Supported Jointly by IFC and Other IFIs in Case Study Countries, 2008­10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 4.5 Performance of the GTFP and the GTLP, July 2008 to June 2010 . . . . . . . . . . . 69 4.6 Nature of IFC Investments in Case Study Countries . . . . . . . . . . . . . . . . . . . . . . . 71 Table of Contents | v Abbreviations AAA Analytic and advisory activities ADB Asian Development Bank AFD Agence Française De Développement AfDB African Development Bank AMC Asset Management Company CDB Caribbean Development Bank CODE Committee on Development Effectiveness DARP Debt and Asset Recovery Program DBSA Development Bank of Southern Africa DDO Deferred drawdown option DEC Development Economics Department DEG German Finance Company for Investments in Developing Countries DFIs Development financial institutions/direct foreign investments DPL Development Policy Loan DPO Development policy operation EBRD European Bank for Reconstruction and Development EC European Communities EIB European Investment Bank ESW Economic and sector work EU European Union FMO Netherlands Development Finance Company FPD Financial and Private Sector Development Department FSAP Financial Sector Assessment Program GDP Gross domestic product GFRP Global Food Response Program GTFP Global Trade Finance Program GTLP Global Trade Liquidity Program HDN Human Development Network IADB Inter-American Development Bank IBRD International Bank for Reconstruction and Development ICF Infrastructure Crisis Facility IDA International Development Association IDC Investissement Développement Conseil Sa IEG Independent Evaluation Group IFC International Finance Corporation IFI International financial institution IMF International Monetary Fund INFRA Infrastructure Recovery and Assets Platform IsDB Islamic Development Bank JBIC Japan Bank of International Cooperation KfW German Development Bank LIBOR London interbank offered rate LIC Low-income country MDB Multilateral development bank vi | The World Bank Group's Response to the Global Economic Crisis MDGs Millennium Development Goals M&E Monitoring and evaluation MEF Microfinance Enhancement Facility MFI Microfinance institution MIC Middle-income country MIGA Multilateral Investment Guarantee Agency OECD Organisation for Economic Co-operation and Development OPCS Operations Policy and Country Services (World Bank) OPEC Organization of Petroleum Exporting Countries PREM Poverty Reduction and Economic Management RSR Rapid Social Response (Program) SDN Social Development Network SMEs Small and medium enterprises SWAps Sector-wide approaches Abbreviations | vii Acknowledgments This report presents findings of the first phase of an Indepen- Department and Chief Economist for the International Fi- dent Evaluation Group (IEG) evaluation of the World Bank nance Corporation. Group's response to the global economic crisis. The second Comments received from World Bank Group management phase of the evaluation is expected to be completed in 2011. on an earlier draft of this report are gratefully acknowledged. This evaluation was conducted by a team led by Ismail Ar- In addition, the evaluation benefited from comments and slan and Daniel Crabtree, drawing on contributions from suggestions raised, notably by the Bank's Chief Economist (in alphabetical order) Federico Arcelli, Amitava Banerjee, and Regional Chief Economists, during an informal discus- Shahrokh Fardoust, Ann Flanagan, Nils Fostvedt, Javed Hamid, Houqi Hong, Sarwat Jahan, Basil Kavalsky, Carla sion meeting convened by the Director-General. Pazce, Manuel Peñalver-Quesada, Anwesha Prabhu, Joanne This first phase of the evaluation was overseen by an IEG Salop, Marcelo Selowsky, and Steven Webb. Agnes Santos Steering Committee comprising Daniela Gressani, Deputy and Richard Kraus were responsible for administrative and to the Director-General, Evaluation, and Senior Advisor; Ali production aspects. Caroline McEuen edited the document. Khadr, Senior Manager, IEG-World Bank; Marvin Taylor- The peer reviewers for this first phase of the evaluation were Dormond, Director, IEG-International Finance Corpora- Johannes Linn, Senior Resident Fellow, Emerging Markets tion (IFC); and Stoyan Tenev, Head of Macro Evaluation, Forum, and former World Bank Vice President for Europe IEG-IFC. The evaluation is conducted under the guidance and Central Asia, and Guy Pfeffermann, Chief Executive of Cheryl Gray, Marvin Taylor-Dormond, and Christine I. Officer and Chairman of the Board at the Global Business Wallich. The work is carried out under the overall leadership School Network and a former Director of the Economics of Vinod Thomas, Director-General, Evaluation. Director-General, Evaluation: Vinod Thomas Director, IEG-World Bank: Cheryl Gray Director, IEG-IFC: Marvin Taylor-Dormond Director, IEG-MIGA: Christine I. Wallich Senior Manager, IEGCR-World Bank: Ali Khadr Head, Macro Evaluation, IEG-IFC: Stoyan Tenev Task Manager, IEG: Ismail Arslan Task Manager, IEG: Daniel J. Crabtree viii | The World Bank Group's Response to the Global Economic Crisis Foreword Responding to the global economic crisis that broke out in Bank Group's own resourcing and capital adequacy for man- the second half of 2008, the World Bank Group has per- aging higher levels of commitments and meeting upcoming formed a strongly countercyclical role. Its disbursements of challenges, notably downswings in the global economy. It is $80 billion in the past two fiscal years were the largest among an open question if an alternative path, calibrating the ac- the multilateral development banks (MDBs). The volume of quisition and application of capital to the changing medium financing from the World Bank Group-- as well as the other term needs of countries, would eventually yield better results MDBs--has fitted the nature of the crisis, which called for a over time. fiscal expansion to compensate for sharply declining trade What is clear from the experience of this crisis reaction is the and private capital flows. benefit of taking a strategic approach, balancing capital ad- There was notable variation across the Bank Group re- equacy, effective deployment of resources, and results on the sponse, with substantially increased International Bank for ground. Elements in such an approach would include both Reconstruction and Development (IBRD) lending, moder- immediate and continuing exigencies: ately higher financing through the International Develop- · Developing mechanisms to ensure early warning, finan- ment Association (IDA), and overall responses from the cial preparedness, and operational readiness. International Finance Corporation (IFC) and the Multilat- eral Investment Guarantee Agency (MIGA) that were not · Blending country-level responses within a global strat- countercyclical. Taken together, the principal recipients of egy to apply scarce resources where they are most the Bank Group lending have been middle-income countries effective. (MICs), some that were especially affected by the crisis. With · Keeping in focus the priority for supporting structural the MICs now leading the global recovery, this engagement reforms in countries for inclusive and environmentally also shows the part the Bank Group now plays in stabilizing sustainable growth, even or especially in the midst of im- world economic growth. mediate crisis demands. The crucial question concerns the effectiveness and sustain- · Maintaining sector or thematic skills and related institu- ability of this crisis response. Good use of funds to sustain tional capabilities in ways that outlast fads or near-term growth and ensure macroeconomic stability is more impor- cycles. tant than ever, in view of emerging fiscal deficits and debt, financial stress, and other risks--especially the threat that · Balancing innovation in instruments and partnerships climate change will derail development. Vital is Bank Group with continuity of delivery to ensure the speed, credibil- support for the capacity of clients--sovereign or otherwise-- ity, and quality that are essential in a crisis. to generate environmentally and socially sustainable growth, · Capitalizing on the combined strengths of the Bank Group reduce poverty, and assure servicing of their debt. through the exploitation of synergies across the Bank, IFC, Sustainability is also a concern from the perspective of the and MIGA and leveraging external partnerships. Vinod Thomas Director-General, Evaluation Foreword | ix Executive Summary The global economic crisis that began in 2008 threatened to more tailored, short-maturity instrument would have helped erase years of progress in developing countries. In response, the response, and the Bank's own financial sustainability, is the World Bank Group increased lending to unprecedented an open question. levels. The World Bank posted a large increase in middle- IFC's financial capacity, though impaired by the crisis, could still income countries (MICs), and a much smaller one in low- have supported a moderate countercyclical response. Ultimately, income countries (LICs). The International Finance Corpo- IFC's response was largely procyclical, following a v-shaped pat- ration (IFC) focused on trade finance, mainly in LICs. Its tern overall. Its crisis initiatives showed creativity and strategic new business initially fell in MICs, rebounding only in late positioning in soliciting funds from external partners and creat- fiscal 2010. The Multilateral Investment Guarantee Agency ing a new subsidiary, the Asset Management Company. Overall, (MIGA) concentrated on guarantees in Eastern Europe. the response has delivered positive effects, mostly in LICs, with Analytic and advisory work helped inform government and existing clients, and in cofinanced operations. But opportuni- private sector responses to the crisis. ties were missed, and the effectiveness of the initiatives has been Increases in financing volume must be matched by quality diluted by design and implementations weaknesses--such as to achieve sustained economic results. Quality-at-entry in- the time needed for fund-raising and internal capacity build- dicators have generally been positive. But certain areas--the ing. MIGA helped several key financial institutions in Eastern financial sector specifically and results on the ground more Europe through guarantees. generally--are a cause for concern, particularly given con- A crisis originating in Organisation for Economic Co-opera- tinued tight budgets. The financial headroom available to tion and Development (OECD) countries tests the readiness the International Bank for Reconstruction and Development of the International Monetary Fund (IMF) first, but global (IBRD) enabled it to launch a large response in a few MICs, interdependence also requires a high state of Bank Group driven by country demand, while the more modest Interna- readiness. Three aspects contributing to the Bank's readiness tional Development Association (IDA) response reflected an were knowledge of poverty impacts, long-term relation- inelastic funding envelope and performance-based resource ships with country authorities, and IBRD's inherited finan- allocation. Most crisis-related Bank financing was channeled cial headroom. Areas of weakness included dissemination to economic policy, social protection, and the financial sector of global economic forecasting updates at the onset of the through record levels of development policy lending, while crisis and early recognition of, and action on, country finan- slower-disbursing investment operations supported longer- cial sector vulnerabilities. With IDA, a midterm increase in term investment, especially in infrastructure. Whether a resources may have been warranted. IFC lessons include the Photo courtesy of Curt Carnemark/World Bank. x | The World Bank Group's Response to the Global Economic Crisis need for financial headroom, sufficient risk appetite, leverag- integrated with the U.S. economy, the epicenter of the crisis, ing existing partnerships and platforms, and staying focused while Europe and Central Asia countries had fiscal and ex- on development effectiveness. MIGA urgently needs greater ternal imbalances and financial sector vulnerabilities. MICs product flexibility and enhanced business development. were more affected than LICs, although LICs had greater vulnerability to negative shocks. Experience gained during This assessment underscores the strong countercyclical role the crises of the 1990s increased the preparedness of several that the Bank Group eventually played, with partners and countries, often with Bank Group help in reforms. countries, to help withstand the global downturn. Its expan- sionary nature fit the profile of the crisis, but the emerging Consensus emerged on the need for fiscal stimulus, within deficits, debt, and financial sector vulnerabilities place a pre- budget constraints. Those with limited fiscal space had less mium on effectiveness of resource use, generation of sustain- room to respond and suffered more severe impacts. But as a able growth, and macroeconomic stability. The assessment group, developing countries have grown more quickly than does not address the open question of whether an alternative industrial countries, and they are leading the global recov- response, involving a lower level of financing in fiscal years ery. Developing country debt-to-GDP (gross domestic prod- 2009­10, coupled with a greater financial capacity going for- uct) ratios were lower at end-2009 than at end-2000, though ward might have better optimized the Bank Group's capital higher than in 2007. But fiscal deficits in both developed and use over the coming years. developing countries have worsened over the past two years (by a sharp 5 percentage points in developing countries). This report presents an initial real-time evaluation of the Countercyclical spending programs are starting to be rolled readiness, relevance, quality-at-entry, short-term results, back as the recovery takes hold. and likely sustainability of the Bank Group response from the start of the crisis through fiscal 2010. This evaluation The crisis reversed the decline in poverty of the past de- builds on a 2008 Independent Evaluation Group (IEG) as- cade. The Bank Group estimates that by end-2010, an ad- sessment of Bank Group interventions during past crises and ditional 114 million people worldwide will have fallen below draws extensively on 11 country case studies and field visits. the $1.25 a day poverty line since the onset of the crisis. Even Given the short time since the crisis response started, the with a rapid recovery, some 71 million people would remain evaluation is geared more to raising flags than to presenting in extreme poverty by 2020 who would have escaped it had definitive conclusions. the crisis not occurred. Unemployment rates remain high in several countries. The evaluation begins with a review of the impact of the cri- sis on developing countries, before describing and assessing World Bank Group Response the Bank Group response, and inferring lessons and implica- tions for the future. Once triggered by high-profile events, the crisis spread quickly, taking many--including the Bank Group--by surprise. The Bank Group responded to the crisis in waves. Impact on Developing Countries Its initial response narrowly focused on increasing Bank The first signs of crisis in the developing world were sharp lending, especially in MICs. As the scale of the demand be- contractions in private capital flows and trade. From a came apparent, the Bank rationed available IBRD capital and peak of around $1,200 billion in 2007, net private capital obtained Board approval for an IDA Fast-Track Facility. IFC flows to developing countries fell by over a third in 2008, as and MIGA developed initiatives to leverage their impact and the liquidity squeeze in advanced economies led investors to (in IFC's case) mobilize funds. pull back from emerging markets. Private flows weakened After initially underscoring only the volume of financial further in 2009. There are indications of a rebound in 2010, support, the Bank Group over time set out linkages across however, with the expectation that flows will increase by 30 programs. In March 2009, the Bank Group announced that percent over 2009. Trade also fell sharply, as export markets it was "stepping up...financial assistance to help its member collapsed, although these volumes are also starting to re- countries mitigate the impact of the crisis" to $100 billion cover. for IBRD, $42 billion for IDA, and $36 billion for IFC. The The severity of the crisis has varied across countries, re- financial assistance would fall under three operational crisis- flecting differences in geography, country policies, and response pillars: protect the most vulnerable; maintain long- global integration. The Latin America and the Caribbean term infrastructure investment; and sustain the potential for and Europe and Central Asia Regions were the most affected. private sector­led growth, with "an over-arching focus on Countries in Latin America and the Caribbean were highly macroeconomic stability." Executive Summary | xi International financial institutions (IFIs) responded haran Africa and East Asia and the Pacific declined, while the strongly to the crisis and posted the largest-ever finan- share of the Middle East and North Africa remained broadly cial flows to the developing world--with the World Bank unchanged, and the South Asia share declined in fiscal 2009, Group registering the largest disbursements. All IFIs have before bouncing back in 2010. The decline in Sub-Saharan seen sharp increases in financing, though the total amounts Africa's share reflects the sharp increase in IBRD lending of the IMF and Bank Group are much larger than those of relative to IDA, rather than any diminution of lending to the other IFIs. Between fiscal years 2009 and 2010, the IMF Sub-Saharan Africa. committed $219 billion and disbursed $67 billion, the no- The sector allocation of resources was consistent with the table difference reflecting the contingent nature of much of Bank's goals for the crisis response. Economic policy, the its support. In the same period, the Bank Group commit- financial sector, and social protection represented 65 percent ted $128.7 billion and disbursed a record $80.6 billion--a of the $28.8 billion increase in disbursements in fiscal years larger amount than other IFIs, including the IMF. Bilateral 2009­10. Social protection, 17 percent of the increase, was development assistance also increased, by nearly $20 billion mainly development policy operations (DPOs) and quick- between 2007 and 2009. Capital headroom was a determining factor. Low pre-crisis demand for IBRD funding left it with the headroom to in- crease lending nearly threefold during fiscal years 2009­10. In contrast, the IDA funding envelope, determined before the crisis, enabled a lesser increase (25 percent). Given eq- uity write-downs and an increase in nonperforming loans, and transfers to IDA from surplus, IFC's capital was more constrained, allowing--based on internal estimates--a rise in annual investments of the order of 5 percent. Approaches to pricing varied. IFC loan pricing is built on the premise that they should complement and not displace private capital, factoring in project and country risk premi- ums. As a result, prices tended to rise most in countries hit hardest by the crisis. IBRD pricing does not discriminate Photo courtesy of Scott Wallace/World Bank. among borrowers, and was historically low at the onset of the crisis. World Bank Bank commitments and disbursements reached an all- disbursing investment loans, and was concentrated in few time high. During fiscal years 2009­10, the Bank commit- loans and few countries, with 60 percent going to Colombia, ted over $105.6 billion and disbursed $68.1 billion, com- Ethiopia, Mexico, and Poland. Infrastructure operations ac- pared with $49.4 billion and $39.2 billion during fiscal years counted only 18 percent of the increase in disbursements, 2007­08. The vast majority of the increase was through the despite being 30 percent of new commitments, reflecting IBRD. Sixty-five percent of IBRD disbursements were from longer lead times. commitments approved since July 2008; the ratio for IDA Much of the increased lending was delivered through was 36 percent. The majority of disbursements from pre-cri- DPOs, but investment lending was robust. Investment sis commitments were investment loans, which showed little lending accounted for about 60 percent of commitments evidence of faster disbursement than in previous years. and disbursements in fiscal years 2009­10, and DPOs--a The distribution of lending broadly mirrored differential medium-term instrument whose suitability for a crisis is crisis impact and financing needs, as well as differences in unclear--for approximately 40 percent. For the IBRD, DPOs IBRD and IDA resources. Latin America and the Caribbean edged above 50 percent of commitments and disbursements and Europe and Central Asia, the most severely impacted in fiscal years 2009­10. For IDA, more than 75 percent of Regions, saw their shares rise. The focus was on social pro- commitments and disbursements were investment opera- tection and other countercyclical programs in Latin America tions. The Bank's response to the East Asian crisis was simi- and the Caribbean, and on fiscal and debt sustainability in larly focused on IBRD policy-based lending. But unlike the Europe and Central Asia. Conversely, the shares of Sub-Sa- Bank's pattern in that event, IBRD investment lending com- xii | The World Bank Group's Response to the Global Economic Crisis mitments grew rapidly during this crisis, fueled by large en- such as the Philippines, the Russian Federation, and Turkey. ergy and transport loans to MICs that have disbursed little The focus in MICs was more on minimizing portfolio losses. to date. New loan pricing rose sharply. Only in the final quarter of fiscal 2010 did MIC commitments start to rebound. The Bank's analytic response has had a relatively low pro- file. Analytic work did not feature in the objectives (or in- The crisis accelerated a trend in IFC toward short-term fi- struments) of the Bank's crisis-response strategy. But central nancing. Global Trade Finance Program (GTFP) guarantees units, especially Development Economics (DEC) and Pov- have grown from a seventh to a third of new IFC commit- erty Reduction and Economic Management (PREM), did ments over the crisis period, contributing to a shift in resource significant analytic work. There were also trust funds for allocation toward the financial sector. Longer-term infrastruc- diagnostic work. Analytic work was supported by Regional ture and real sector investments have declined considerably. and country units, according to resource availability and the Within these clusters, investments in physical infrastructure severity of the crisis impact. (particularly electric power) and agribusiness (agriculture and forestry in particular) declined most. IFC IFC responded with new global initiatives--including Activities in advisory services increased. Expenditures on the creation of a new subsidiary--and actions through its new crisis-related advisory products (nonperforming loan regular business. The initiatives involved new delivery plat- management and insolvency regimes) were relatively small, at $13 million, through the end of fiscal 2010, although ex- forms targeting trade finance, infrastructure, microfinance, penditures on core products (such as corporate governance bank capitalization (overseen by a new subsidiary, the As- and business environment work, mostly approved prior to set Management Company), and distressed asset manage- the crisis) increased by around $20 million in fiscal 2009 and ment. They were intended to leverage IFC's funds with up were often linked to crisis needs. to $24 billion from external partners (development finance institutions in particular) by 2011. IFC also participated in MIGA joint IFI initiatives in Europe and Central Asia, Latin Amer- MIGA's response is built around but not limited to a new ica and the Caribbean, and Sub-Saharan Africa. IFC made global Financial Sector Initiative, focused initially on the $20 billion in net commitments between fiscal years 2009 Europe and Central Asia Region. Under this initiative, and 2010 from its own account, alongside efforts to ensure part of the Joint IFI Action Plan for Central and Eastern the financial sustainability of its portfolio. Europe, MIGA announced it would provide up to 2 bil- lion in political risk insurance on cross-border investments IFC's initiatives were designed for phased implementa- by financial institutions to recapitalize or provide liquid- tion, but have been well behind schedule. Three stages of ity to subsidiaries. Drawing on its capacity to arrange re- needs were envisaged: short-term liquidity (trade); longer- insurance, this could commit up to $1 billion of MIGA net term liquidity and equity capital (microfinance, infrastruc- exposure in the Region. In fiscal 2010, guarantees totaling ture, and bank capitalization platforms); and recovery sup- $918 million were issued under the initiative (six contracts port (distressed assets management). As of June 30, 2010, issued in Serbia, Croatia, Latvia, and Kazakhstan), bringing $9.2 billion had been approved for new initiatives, but only MIGA's total cumulative support under the Financial Sector $1.9 billion had been disbursed. The new Global Trade Li- Initiative to $1.5 billion in gross guarantee coverage. quidity Program (GTLP) is the only one close to its target. MIGA's guarantee issuance remained broadly unchanged IFC's new business during the crisis has followed a v- but has become increasingly concentrated in the finan- shaped pattern. New IFC business, which had more than cial sector since the crisis began. MIGA's guarantee ac- doubled from 2005 to 2008, fell by 18 percent in fiscal 2009, tivity remained at trend levels during the crisis, with some before increasing 28 percent in 2010. The v-shaped pattern $1.4­$1.5 billion in new guarantees in fiscal 2009 and 2010. of investment largely mirrors that of private investment as At the same time, cancellations declined and MIGA's gross a whole. Meanwhile, IFC doubled the number of portfolio outstanding portfolio of guarantees reached $7.7 billion in staff and carried out stress tests on its portfolio clients. fiscal 2010 (19 percent over fiscal 2008), as more investors IFC's new business increased in LICs but, unlike the Bank's held onto their guarantees. MIGA's crisis response initiative pattern, fell in MICs. IFC's investments in IDA countries in- resulted in a large share of its guarantees issuance concen- creased 24 percent between fiscal years 2008 and 2010. Com- trated in the Europe and Central Asia Region and in the fi- mitment increases were largest in Ghana and Pakistan. Con- nancial sector, while activity in infrastructure fell sharply, to versely, IFC reduced its investment volumes in larger MICs, some extent reflecting market developments. Guarantees in Executive Summary | xiii IDA countries also declined as a share of guarantee volume. The increase in lending was concentrated in the MICs most Guarantee issuance was concentrated in terms of clients hurt by the crisis, such as Colombia, Mexico, Turkey, and (guarantee holders), with the top two clients accounting for Ukraine. There were important exceptions, however, such 80 percent of guarantees issued in fiscal 2009. Fully 88 per- as the large increase in IBRD commitments to Indonesia, cent of new guarantee issuance that year supported projects among the least-affected countries, which served as support in the Europe and Central Asia Region. for the country's crisis-prevention efforts. India, moderately affected by the crisis, has seen a record rise in commitments Assessment of the World Bank Group in fiscal 2010. Response The relevance of the Bank's analytic response is signifi- cant in some countries, but weak in others. Earlier analytic World Bank work provided a platform for the Bank response in some Lags in the Bank's adaptation to the crisis affected the countries, sometimes in conjunction with international sup- early phases of the response. At the 2008 Annual Meetings, port packages. Where limited prior work was available, the the Bank focused on the need for a new multilateralism. The quality of lending suffered. In some countries, in Europe and IMF called for an immediate and coordinated response to Central Asia in particular, increased lending appears to have the crisis. Given that the crisis emerged in the financial sec- crowded out new analytic work, a critical determinant of the tor of advanced economies, the IMF had a more natural role quality of policy dialogue and lending, while in many others in leading and sounding the alarm, but the Bank still needed trust funds and/or incremental allocations from the Bank's to--and eventually did--react strongly. budget allowed continuation of the work. Once the Bank internalized the crisis, the speed of its The design of programs appears to have been tailored to response was helped by several factors. The Bank's ongo- countries' diverse needs. Quality of program design was ing relations and dialogue enabled more rapid engagement high in Georgia, Indonesia, and Mexico. In Hungary, how- with country authorities. Speed was also facilitated by Bank ever, the Bank did not respond adequately to country needs. Group leadership and the establishment of a central opera- The quality of the Bank's prior engagement with the coun- tional structure, with the Operations Committee and the try seems to have been a determining factor. And coordina- newly formed Crisis Response Working Group chaired by tion with other partners, including the IMF, helped enhance Operations Policy and Country Services. quality and relevance, and thus likely impact. Readiness was helped by the Bank's financial position at Quality at entry of DPOs has been notably varied, reflect- the start of the crisis. IBRD went into the crisis with an ing sector strengths and weaknesses. The evaluation made equity-to-loans ratio of 38 percent, compared with a target an initial assessment of quality at entry for 46 DPOs, cover- range of 23­27 percent, giving it substantial room to ex- ing 68 percent of DPO volumes approved during the crisis pand lending. This reflected prudent financial management period. The ratings were satisfactory on average, but ranged as well as stagnant demand from MICs during the previous from highly satisfactory to unsatisfactory. The substantive years. IBRD commitments had declined by 5 percent during program policy content and results frameworks for financial fiscal 2007­08. IDA15 had just become effective on July 1, sector DPOs were the weakest, followed by infrastructure. 2008, increasing IDA resources by about 25 percent, on top Results frameworks for economic policy work had the most of a 25 percent increase in fiscal 2006­08. acceptable levels of quality, followed by social protection. Another positive factor was the Bank's ability to draw on The Bank's flat overall administrative budget complicated its research and knowledge of poverty reduction--which delivery, which made the operational efforts all the more now needs to be maintained. This included surveys enabling notable. Administrative resources for Bank country services better targeting. The accumulated knowledge reflected con- rose about 5 percent annually in fiscal 2009 and 2010, barely tinuing investments by DEC, PREM, and the Human Devel- enough to cover the surge in the operational work program opment Network (HDN) over the years on poverty, social that was associated with the crisis response. The implied safety nets, and labor markets. Examples include Bank sup- "productivity" increase was achieved in part through larger port for conditional cash transfer programs in Bangladesh, project size, which doubled for IBRD and increased by 30 Colombia, and Mexico and labor market improvements in percent for IDA. But economies of scale have limits, raising Poland, Turkey, and Vietnam. Ongoing monitoring of the important concerns--now and going forward--about trade- poverty and social effects of the crisis could, however, have offs with operational quality (at entry and in supervision) been more systematic. and analytic work. In Ukraine and elsewhere, there was a xiv | The World Bank Group's Response to the Global Economic Crisis lack of funding for economic studies; but not in Indonesia or documents examined fiscal and debt sustainability, comple- Mexico, given trust funds in the former and central contin- mented in many country programs by analytic work on pub- gency funds in the latter. lic expenditures, including public investment, and poverty alleviation. The objective of maintaining public investment Attention to poverty issues was greater than in previous in infrastructure was also accompanied, in some cases, with crises. The 2008 IEG review of lessons from previous crises the objective of supporting employment (through labor-in- emphasized the importance of identifying the poverty and tensive infrastructure) and other social objectives. But many social impact of a crisis, including measures directed to ad- risks to sustainability remain, in some cases related to the dress these impacts. The focus on poverty issues at the coun- underlying political economy of rollbacks in fiscal stimulus try level was apparent in the content of DPOs, other lending and rationalizations of social security, pension, and health (and supplemental financing) for community-driven devel- system benefits. opment projects, and analytic work on improved targeting The Bank's financial sector capacity had deteriorated, with of safety nets. At the same time, ongoing monitoring of the adverse consequences. Starting in 2005, the Bank had sub- social and poverty effects of the crisis could be enhanced. ordinated its work on the financial sector to its efforts on pri- Fiscal and debt sustainability analysis was present in vate sector development more generally. Subsequently, with DPOs, but could have paid greater attention to macro the exception of Europe and Central Asia and Africa, units and political-economy risks. As required, DPO program covering the financial sector were integrated within PREM. When the crisis hit, current Financial Sector Assessment Programs (FSAPs) were available for approximately one- third of client countries. The lost capacity in the financial sector proved to be costly in identifying and responding to sector vulnerabilities, as did an ill-designed 2007 strategy for the financial sector. IFC IFC's response was important and creative, even as its exe- cution did not match intentions. IFC's $20 billion of invest- ments in developing countries in fiscal 2009 and 2010 was greater than any other IFI with private sector operations over the same period. IFC also appropriately focused its response on key crisis vulnerabilities: trade, financial sector stabiliza- tion, and infrastructure. The initiatives showed some learn- ing from past crises, in being targeted, phased, temporary (in most cases), and involving partnerships. However, IFC's added value has been less than expected, since most initia- tives were not "ready for use" and IFC did not fully use its own capital. IFC may have underestimated the challenges associated with implementing new initiatives. Obstacles included: accommodating partner preferences, building institutional capacity, demands on staff time (in the context of a hiring slowdown and large-scale internal reorganization), weak staff incentives to use the initiatives, limited ownership in the Regions, and difficult conditions for fundraising. The Global Trade Liquidity Program (GTLP) was the only new initiative able to adapt effectively to these constraints, notably through the establishment of a novel trust fund for investments and in extending relationships built up through the GTFP. Photo courtesy of Eric Miller/World Bank. IFC's capital position was impaired by the crisis, but could have supported a moderate countercyclical response Executive Summary | xv overall. In September 2008, IFC's balance sheet contained Vietnam. Trade finance is a relatively low-risk pathway to substantial unrealized equity gains, and write-downs were reach small and medium enterprises (SMEs) in tough in- significant ($1 billion). Nonperforming loans were rela- vestment environments and requires limited capital. IFC's tively low, but expected to rise. IFC had also committed to capacity for local currency finance was again limited, lead- significant grants to IDA ($1.75 billion between fiscal 2008 ing to gaps in addressing financing needs of medium and and 2010). Nonetheless, IFC's estimate that it could invest small enterprises. 5 percent more per year in fiscal 2009­11 than in 2008 was The drop in infrastructure and agribusiness investments conservative, given a rating agency assessment that IFC was reflected supply and demand constraints. In infrastructure, well capitalized and experience that showed gains in invest- the focus on IDA and renewable energy contributed to smaller ing countercyclically during a crisis. Ultimately, IFC invest- deal size. External conditions led to some projects being can- ments fell nearly 20 percent in the first year of the crisis-- celled or postponed. IFC nonetheless missed opportunities for well below expectation. impact, not least because the Infrastructure Crisis Facility was Most comparator institutions delivered countercyclical not ready to complement IFC's own account and help to ad- responses. Most other IFIs (European Bank for Reconstruc- dress the infrastructure financing deficit in developing coun- tion and Development, European Investment Bank, and tries. In agribusiness, an unanticipated suspension of palm Asian Development Bank) as well as Standard Chartered (a oil investments, together with a review of supply chain issues, private financial institution focused on emerging markets) meant lost projects. Trade finance helps agribusiness indirect- were able to increase their investments in the first year of ly, although increases here did little more than offset the drop the crisis. In Europe and Central Asia, the European Bank in IFC's direct agribusiness investments. for Reconstruction and Development (EBRD) concentrat- MIGA ed more on large-scale loans, while IFC focused on equity MIGA's heavy focus on the financial sector in the Europe transactions, alongside trade finance. and Central Asia Region was in line with initial crisis At the country level, IFC did little to refocus its top-down needs. The financial sector in Europe and Central Asia was approach. In Mexico, IFC's strategy reflected the pre-crisis at the heart of the crisis and needed urgent assistance. MIGA preference for niche investments in upper MICs. IFC loan supported some key financial institutions in the Region and pricing rose substantially as a result of the crisis, as perceived helped keep down their borrowing costs. The drop in cancel- country risk increased, which worked against the country lations also meant that MIGA played a supportive crisis role team's efforts to help global leaders and first-tier companies with existing clients. At the same time, MIGA did not pro- vide significant support elsewhere, and its guarantees in IDA in distress. In Indonesia, the approach was similarly cautious, countries and other priority areas fell. Awareness of MIGA and too defensive given the relatively mild impact of the crisis among major private sector parties in the countries visited and the extent of external support. The exception was Geor- for this evaluation was low, indicating a need for stronger ef- gia, where IFC provided support to two systemic banks as forts at business development. And as IEG has highlighted part of a massive IFI package to assist the country. previously, MIGA needs to streamline its business processes Meanwhile, communications to investment staff were un- and improve its client responsiveness. clear, which promoted risk aversion. Staff received mixed messages: to identify countercyclical investment opportuni- Early Outcomes and Risks ties, but to preserve the balance sheet at all costs. Ultimately, At this stage, the focus is on the early results relative to portfolio management crowded out new business develop- stated objectives: protecting vulnerable groups, maintain- ment, which stagnated in mid fiscal 2009, notably in Europe ing infrastructure, and sustaining private sector­led growth, and Central Asia. within an overarching focus on macroeconomic stability. IFC was at its most responsive in LICs. IFC's increased fo- Partnerships and, above all, actions taken by countries and cus on IDA countries was sustained in the crisis period, a companies, have been leading drivers of these early results. positive development in that IDA countries have a weaker Bank Group disbursements helped countries maintain so- economic base and have largely missed out on the influx of cial programs and microfinance. For example, in Colom- foreign capital prior to the crisis. bia, the Families in Action Program expanded assistance, IFC adapted its instrument mix, but more local currency with Bank support, to approximately 2.7 million poor and financing was needed. GTFP dominated the increase in displaced families. Similarly, in Mexico, the Bank supported financing, much of it to support banks in Bangladesh and Oportunidades, the national conditional cash transfer pro- xvi | The World Bank Group's Response to the Global Economic Crisis gram that helps 5.8 million of the country's most vulnerable cially in view of the economic uncertainties and risks, there families to cope with poverty. In Bangladesh, an IDA loan is a need for continuing investments in analytic work. was helpful in mitigating the impact of high food prices on the poor through an expansion of social safety net programs, Early Lessons including public works. IFC's trade initiatives have had a An overarching lesson emerging relates to the value of a broad reach, supporting basic needs through food and en- strategic approach to the Bank Group's crisis-response ef- ergy trade. IFC's new microfinance facility has had a modest fort, integrating six elements brought to the fore by this crisis effect. experience. The Bank Group supported investments in infrastructure, First, in these uncertain times, early warning, preparedness, but there is little early evidence of any impact. First, few and timeliness, including an eye on long-term capital ade- of the Bank's large commitments for new investment loans quacy, are key attributes for the World Bank and IFC. Second, have been disbursed. Meanwhile, the quality of the results the benefits of the Bank's country focus go hand in hand with frameworks for DPO support to the sector in Indonesia and the need for a cross-country strategy to ensure consistency Vietnam indicate risks to getting sustained results. Second, with global initiatives and to deploy scarce resources where IFC's investments in infrastructure recorded one of the larg- they produce the best results. Third, even as it responds to est declines among all sectors, and its infrastructure facility crisis, the World Bank Group needs to keep the requisites has delivered only a handful of projects. of sustainable long-term growth--among others, fiscal and The Bank Group provided strong support in trade finance debt sustainability, the structural reform agenda, and the en- but missed opportunities in other areas related to private vironmental and climate change agenda--in focus. sector growth. IFC provided timely and sizable liquidity Fourth, particularly in averting a crisis, it is costly to let the support, especially in LICs, through its trade finance plat- Bank's expertise in key areas (in this case the financial sec- forms. But it missed opportunities for strong additionality tor) decline. Fifth, there is a need to balance the value of in- and development impact, especially in MICs. MIGA's weak novations and new initiatives in the middle of a crisis with business development function was a binding constraint continuity of support using more established and proven on new guarantee volumes and results. The Bank provided approaches. And sixth, coordination is needed among the sizable support to the financial sector, but sustainability of World Bank, IFC and MIGA (and with other partners) to results may be at risk due to insufficient attention to sector capitalize on linkages across government and business and reforms in some cases. catalyze economic activity. The Bank Group and partners contributed to confidence- The findings also point to specific early lessons for each Bank building and macroeconomic stability, but crucial chal- Group institution. lenges remain. Indonesia illustrates the value of contingen- cy financing led by the Bank, with participation of the Asian World Bank Development Bank, Australia, and Japan. IFC and MIGA's Continuing Bank involvement, policy dialogue, and an- new private sector initiatives may initially have had positive alytic work are important prerequisites. This is evident signaling effects on markets. Experience has shown the im- from the case study countries, both where the Bank re- portance of timely, visible investments by IFC in companies sponse worked well, as in Indonesia, Mexico, Mauritius, and of systemic importance to send market signals and for de- Ukraine, and where it did not, as in Hungary. It also points velopment impact--a standard only a few investments met to the critical importance of keeping diagnostic work in key during this crisis. areas up to date. The Bank Group helped authorities to think through fiscal The Bank should balance advocating global priorities and debt sustainability issues, but timely fiscal consolida- with country ownership. The Bank's identified sector and tion is still needed. The Bank's advice through DPOs, ana- thematic crisis-response priorities must be positioned as lytic work, and policy dialogue--often together with that of menus for country selection to avoid the possible impres- the IMF, and including advice given in the years leading up sion of advocacy, especially where the Bank may be a pos- to this externally driven crisis--was important in managing sible financier. fiscal and debt vulnerabilities. The Bank also continued to Greater clarity is needed in the use of instruments for support reforms in public financial management to make the crisis response. This evaluation found that country teams budget more transparent, predictable, and performance ori- used DPOs, Additional Financing, and other instruments ented (for example, in Mexico, Poland, and Vietnam). Espe- Executive Summary | xvii in innovative ways, with the endorsement of the Operations costs of the crisis to them, and there is thus a need for greater Committee and approval of the Board. However, greater Bank proactivity on their behalf. clarity on policy conditionality of crisis operations would Finally, it is crucial to assess emerging impacts early to iden- have facilitated the Bank's response. tify quality problems and risks and remedial action. The eval- The Bank needs to anticipate crises and be ready to act uation identified quality risks and concerns in sector DPOs-- quickly, taking into account quality trade-offs and consider- especially in the financial sector and in infrastructure. ing benefits and costs across sectors. IFC · The Bank should continue to play a proactive role in pro- IFC's development role is vital, and looking beyond port- viding early warnings and alerts to clients and the broad- folio protection is essential. IFC will need to have sufficient er international community. In hindsight, an example resources for a significant catalytic role when the next crisis is the value that could have been derived from sharing strikes and be willing to take more investment risks--as it updates of economic forecasts for developing countries has done in Africa. Incentives and mechanisms for increased at the Annual Meetings and Development Committee equity divestment could also be helpful in freeing up funds Meeting of October 2008. for a crisis response. Active, routine portfolio stress testing · The Bank's capacity in the financial sector needs to be can be useful, as opposed to reactive portfolio management maintained, as was also learned from the East Asian cri- that may crowd out new business, as in this crisis. sis. Core capacity is needed in order to maintain stead- A crisis response has to be founded on partnerships, but fast attention to capital adequacy; independent supervi- cooperation needs the right incentives and support. Given sion and regulations; timely and transparent reporting; the vast financing needs a crisis can generate, no single de- and, on investment lending, to ensuring that financial velopment institution is likely to have sufficient capacity to intermediaries have balanced assets and liabilities with respond. Partnerships are therefore essential. In some cases, respect to maturities and foreign exchange exposure. partnerships allowed for strong leveraging of IFC funds, par- · It is vital to be up-to-date on diagnostic country econom- ticularly where the initiatives were not seen solely as IFC pro- ic and sector work in key areas. The public expenditure grams and where IFC's sector expertise was well recognized. review is a signature Bank contribution, especially in or- In other cases, cooperation stalled due to nonaligned interests der to support prioritization of sector aspects of the crisis and decision-making procedures, incentive problems, and le- response. gal issues. IFC will need to be sensitive to partner needs and institutional arrangements and create incentives for them to · IBRD capital headroom in a crisis is central. This experience participate fully in joint programs. reveals the importance of anticipating capital adequacy at the outset, as well as its use during the crisis. It remains an Responding to the crisis through existing platforms and open question whether it was best for the Bank to use up partnerships has generally proved more effective than virtually all of its capital headroom in responding to the cri- working through new ones. Experience shows the benefits sis. MIC demand for countercyclical lending may remain of having ready financing and advisory platforms. Innova- significant, but IBRD response capacity may not be large, tions are important, yet it is unwise to develop numerous even with the recently agreed capital increase. New instru- new financing platforms on the run in a crisis, particularly ments need to be put in place, involving shorter maturities platforms that are managed by third parties or involve fund- or a combination of pricing and maturities for early pay- raising from multiple new sources. New programs and rela- back, possibly with a countercyclical financing facility as in tionships absorb time and resources that could be deployed other multilateral development banks (MDBs). to frontline operations. IDA must remain the Bank's flagship resource-mobili- Finding the right level of adaptation to changing circum- zation activity. IDA fast-tracking helped to speed the pro- stances is fundamental for an effective crisis response. cessing of eligible operations, but it was no substitute for IFC will need to find the right level of change, including de- increased resources. IDA committed 24 percent more in fis- termining which initiatives continue to have relevance and cal years 2009­10 than in fiscal 2007­08 and disbursed 15 which might be dropped, as well as how new partnerships percent more. IDA crisis financing had to be accommodated and platforms are best aligned with IFC's business model. within the IDA15 resource envelope that was agreed in 2007. In a future crisis, IFC may want to postpone rapid internal Though MICs have been more affected by the crisis given reorganization and develop mechanisms to incorporate local their greater global linkages, LICs are far less able to bear the views and knowledge to enable differentiated responses. xviii | The World Bank Group's Response to the Global Economic Crisis The shift in IFC instruments toward trade finance guar- an important step, and needs now to be complemented by antees was useful, but the instrument mix will need to more streamlined business processes and proactive business shift again. Short-term trade finance was useful, because it development efforts. could be ramped up through IFC's broad network of utiliza- tion banks. It also absorbed limited capital. As commercial Issues Going Forward providers enter the market, IFC will need to look to other in- struments. Capacity to offer local currency finance was again The crisis created an immediate need for countercyclical lacking in this crisis, creating considerable risks for SME cli- spending in developing countries, which the Bank Group and ents with local-currency revenue streams. others have supported. To help sustain the recovery, contrib- ute to longer-term growth, and improve the response capacity Monitoring and evaluation (M&E) for new programs will of the Bank Group, attention needs to be given to two areas: need to improve. The importance of robust results frame- policy change and organizational effectiveness. Policy issues works is magnified where new delivery structures are being concern fiscal sustainability, public-private synergies, finan- cial sector reform, poverty and unemployment alleviation, and greener growth. In terms of organizational effectiveness, preparedness, managing quality trade-offs, coordination, and a strong results focus will be crucial. Policy Issues Fiscal sustainability. Economic slowdown and fiscal ex- pansion have pushed debts and deficits in many advanced and some developing countries to unsustainably high lev- els. While fiscal or monetary stimulus may still be needed in some countries, policies need to reestablish sustainable macroeconomic conditions. Growth will depend on, among other things, the quality of public expenditures, where the World Bank can be valuable--for example, through more regular Public Expenditure Reviews. Photo courtesy of Curt Carnemark/World Bank. Public-private synergies. A key policy task is to ensure a smooth transition of demand from government to the pri- vate sector. At the same time, there is a widespread need to created to ensure quick feedback on what is working and strengthen government capacities to regulate private sector what is not. M&E of new initiatives will need to be made activities effectively. The private sector, as the main engine of more systematic. The difficulties in measuring the develop- growth, will need to be supported through policies, regula- ment impact of the GTFP and GTLP, not covered in IFC's tion, and access to finance. These reforms should not be left M&E framework, need to be addressed. for later stages of crisis response. MIGA Financial sector reform. Financial sector weaknesses persist For MIGA, the crisis has amplified the need for product in the global economy and continue to pose downside risks flexibility and business development. MIGA's portfolio to recovery in advanced and developing countries. There is a experienced a net increase during the crisis period as guar- pressing need to shift from emergency support to addressing antee issuance remained at trend levels and cancellations the structural weaknesses exposed by the crisis. This would declined, and MIGA's focus on the financial sector in the involve repairing or strengthening financial systems while Europe and the Central Asia Region was strong. Yet glob- reforming prudential policies. The Bank Group can help, but ally, MIGA's crisis response was not significantly counter- it needs to rebuild its capacity. cyclical. This reflected the inherent structural constraints of its Convention as well as weak business development. Poverty and unemployment. As in previous crises, unem- MIGA needs to revamp its business development function ployment, one of the main causes of worsening poverty levels, to reverse the current stagnation in guarantee issuance and has lagged GDP growth. Monitoring of the poverty and social enable the Agency to meet its business volume targets and effects in this crisis has emerged in an ad-hoc manner, and strategic priority goals. The recent approval of the changes higher-frequency tracking is needed going forward. A greater to MIGA's Convention to allow greater product flexibility is focus on LICs and inequities in MICs is also required. Executive Summary | xix Environmentally sustainable growth. Climate change and cumulative commitments) may, under an essentially flat ad- environmental problems are tougher to deal with in the face ministrative budget envelope, crowd out critical analytic and of a financial crisis, yet the sustainability of global economic advisory work--with adverse consequences for the quality of growth necessitates simultaneous actions. To be effective, future lending--needs to be carefully managed. such longer-term investments need to be factored into any Coordination. The premium on partnership and coordi- crisis response: the Bank Group's strong participation in nation is particularly high at times of market uncertainty. scaling up public sector spending provides a unique oppor- Moreover, financial and capacity constraints make coordi- tunity. The Bank Group must build on the momentum in nation with external partners--and the focus on selected mobilizing funds for climate change mitigation to integrate areas where the Bank Group has comparative advantage-- greener development in its mainstream activities. imperative. A significant part of the Bank Group's response Organizational Effectiveness has taken place in the context of partnerships with the IMF, Preparedness. As crisis-related events continue to evolve, regional banks, and others, but the challenge remains to sus- the premium on early warning, financial preparedness, and tain and deepen cooperation. Strong internal cooperation, to operational readiness is at an all time high. Stronger fore- capitalize on unique linkages across public and private sector casting, with greater country/global connectivity, is crucial. spaces, will also be important. Tools to optimize capital availability will be important, given Focus on results. A sharp focus on results, which incorpo- that the capital headroom of the World Bank and IFC has rates longer-term structural change, is critical when Bank been virtually used up and the recent capital increase pro- lending is at an all-time high and concerns persist about the vides only limited new headroom. From an operational sustainability of the global recovery. This situation--togeth- standpoint, rebuilding Bank Group financial sector capacity er with the greater focus than in the past of conditionality is fundamental. based on a few prior actions, with country ownership--plac- Quality trade-offs. The risk that lending preparation (to es a premium on ensuring clear and measurable objectives, rebuild a project pipeline that has been depleted as part of M&E, and Bank Group commitment to implement correc- the crisis response) and supervision (of a now-larger stock of tive actions. xx | The World Bank Group's Response to the Global Economic Crisis Management Response Introduction meet immediate financing needs of client countries, helped countries in their efforts to boost market confidence, and Management welcomes the opportunity to comment on provided analytical support to the formulation and imple- IEG's initial evaluation of the response of the World Bank mentation of crisis-response policy programs. Management Group to the economic crisis. As IEG notes, it is too early agrees with IEG that disbursements accelerated in fiscal to evaluate the outcomes of Bank Group support during the 2009 and 2010, and in IBRD and IDA countries. In addition crisis, but management finds the Phase I evaluation use- to deploying financial resources through new commitments ful in raising issues for attention. Management appreciates to assist client countries in this time of need, management the evaluation's finding that the Bank Group's response was also placed additional emphasis on the disbursement of ex- quick, relevant, innovative, and effective across a range of as- isting commitments. This effort was evident, in particular, pects that could be observed within the short period of time in IDA countries. Bank support was aimed at protecting key since the onset of the crisis and the Bank Group response. expenditure priorities and programs, including investment, We also appreciate that the evaluation found the Bank re- safety nets, and environmental management, to ensure that sponsive not only in scaling up countercyclical financing, the country-level response was supportive to long-term de- but also in providing timely knowledge services through velopment. analytical support, particularly at the country level. Trade-offs and Instruments. Cognizant of the trade-offs Evaluation Findings between responding quickly to the needs and maintaining Management concurs broadly with the findings of the evalu- adequate quality, management put in place several arrange- ation and issues for continuing attention. We also note that ments to ensure the quality of both the overall financial re- this early phase of the evaluation will be further strength- sponse and individual operations, as recognized by IEG. A ened and refined with more evidence collected through Crisis Working Group was established to manage the Bank's completion reviews of Bank Group support instruments and financial response in an effective, prudent, and fair manner. country data as it becomes available. The comments below The Operations Committee stepped up its oversight role so are meant to point to areas and themes on which the second as to manage risks and enhance effectiveness, and reviewed a phase may focus. In addition to these comments, manage- record number of operations. Management appreciates that ment stands ready to provide IEG with more country- and the evaluation recognizes these efforts. Management notes operation-specific background and detailed factual informa- that the evaluation acknowledges country appreciation of tion, which would further strengthen the final evaluation. the flexibility of the Bank's response, creatively using the Organization of the Comments instruments at its disposal. That said, management contin- Given the organization of the IEG evaluation, management ues to keep a close eye on the instrument issue. It discussed comments cover the World Bank response, the IFC response, with the Board in January 2010 a comprehensive review of and the MIGA response in that order. The last section of instruments; it is currently revising and updating policy in a management's comments cover particular country issues. number of areas, and is continuously monitoring the menu of instruments to identify any additional gaps in the instru- World Bank Response to the Crisis ment tool box. Overall Comments on Bank Crisis Support Management Observations on Management appreciates that the evaluation recognizes Selected Issues the Bank's effort to support client countries during this un- As stated earlier, management agrees with many of the pre- precedented period of economic downturn and turmoil in liminary findings of this first phase of evaluation and the financial markets. Shortly after the onset of the crisis, the questions for monitoring as the crisis response moves for- Bank moved to deploy its financial and analytical capacity to ward. However, there are a number of issues on which man- Management Response | xxi agement has observations it would like to raise. Management and Private Sector Network done as the crisis unfolded is not would hope to work closely with IEG during the next phase acknowledged. of its work in further clarifying these points. The evaluation states that "starting in 2005, the Bank had Anticipating the Downturn. The evaluation states that the subordinated its work on the financial sector to its efforts on Bank was slow in recognizing the crisis. However, IEG does private sector development more generally." However, this not highlight a number of internal briefings by the DEC Pros- reading of the Financial Sector Development­Private Sec- pects Group before the 2008 Annual Meetings, including in- tor Development merger should perhaps be revisited in the ternal notes to senior management and the Short-Term Risk next stage, drawing on the available evidence. Similarly, the Monitoring Group. Key messages in those briefings were: report refers to "an ill-designed 2007 financial strategy" as a cause of failure to identify and respond to sector vulner- · Many developing countries would be adversely affected abilities without explaining what was unsatisfactory about by the deteriorating global economic conditions--they the design of the strategy, which in fact correctly focused could no longer rely on their resilience and growth dy- on building capacity to respond to emerging vulnerabilities. namics. The financial sector strategy itself has not yet been indepen- · Private sector investment and private capital flows would dently evaluated. be under heavy pressure, and private investment would While management agrees that there was erosion in the Bank's increasingly need public sector funding, which might overall financial sector skills and capabilities, it was not across come with considerable delay. the board, and some Regions, Europe and Central Asia and · Even with a sharp downward adjustment of baseline fore- Africa in particular, maintained core skills capabilities and casts, much worse scenarios had become plausible. analytical work. The report attributes the weakening of the financial sector capacity to "with the exception of Europe and In September 2008, DEC disclosed its projection of a sharp Central Asia, units covering the financial sector were integrat- deterioration in the world economy. In October 2008, it pre- ed within PREM." This is a surprising line of argument. Africa dicted the first contraction in world trade since 1982, while Region FPD did not integrate with PREM and continues to most other organizations were still forecasting strong trade have an FPD director. Even in the Regions with a joint FPD- growth. PREM director, separate FPD units remain. The first-stage Financial Sector Capacity and Response. Management con- evaluation does not show any evidence to indicate that the curs with many of the key findings and message of the evalu- response to the crisis was better or worse based on different ation, notably the importance of maintaining core skills and internal management structures. capabilities in financial sector analysis and advice, the im- Use of Disbursement Measures to Assess the Bank's Crisis portance of having up-to-date Financial Sector Assessment Response. While disbursements are a compelling metric for Program reports and other AAA to support financial sector gauging the size and effectiveness of the response, overly lending operations, the value of carrying out crisis simula- emphasizing it, as the evaluation tends to do, downplays the tions, and with the importance of improved Bank-Fund col- positive effects of other options, such as signaling (includ- laboration. However, there are a number of assertions that ing deferred drawdown options), supporting market confi- management would ask IEG to review as its work goes for- dence, and financing key infrastructure investment projects. ward. Consequently, management is of the view that disbursement The evaluation states that the policy content and results measures are a useful metric to capture the Bank's response to immediate financing needs of its client countries, but they frameworks of financial sector DPOs were the weakest. This fall short of gauging the full impact of the Bank's crisis re- conclusion appears to be derived from the evaluation of two sponse. Management would ask IEG to incorporate this is- DPLs, Nigeria and India (see below for country-specific sue into the next phase of its work. comments). This conclusion does not seem to take into ac- count the financial sector work and operations in Colombia, Jordan, and Ukraine, which are evaluated as exemplary in IFC Response to the Crisis the IEG report. Furthermore, as noted below, the assessment Overall View of IFC during the Crisis of the Nigeria and India operations seem to reflect informa- Management appreciates the coverage in this report of the tion gaps and misunderstanding of the country contexts and strategic situation facing IFC at the time of the crisis and policy contents of the programs supported by these opera- the overall strategic goals of its response. Nevertheless, we tions. In general, much of the informal work of the Financial feel that the report underplays the quality and significance xxii | The World Bank Group's Response to the Global Economic Crisis of IFC's crisis response, by focusing too narrowly on com- tinued to focus its scarce resources on the more difficult mitment volume and downplaying the critical development countries to the east and on equity products, areas that have impact of helping existing clients, providing trade finance, considerable potential for development impact, even though focusing on IDA, and working with other IFIs in a number volumes could be lower. of crisis initiatives. Finally, even though we believe IFC provided a very effective In our view, IFC executed its crisis response and countercy- response to the current crisis, we agree with IEG's point that clical role in a number of ways, many of which are acknowl- maintenance of a greater cushion of available investment ca- edged in the IEG report. At the onset of the crisis IFC's capi- pacity, so that IFC would have more potential to rapidly ex- tal position provided the opportunity for steady to modest pand investments in any future crisis, is an important lesson growth in commitments. Within this context, IFC focused from the recent crisis experience. on a number of concurrent areas. It worked with existing cli- Asset Management Company (AMC) ents to support their business and maintain viability in dif- Page 64 states, regarding potential conflict of interest with ficult times. For new business, while many pipeline projects partnerships--As new partnerships develop, important risks were postponed or canceled as the market situation changed are likely to emerge that need to be managed carefully ­ no- dramatically, IFC kept its focus on IDA countries and Africa, tably conflict of interest. Separate legal entities have been cre- and expanded trade finance to meet the growth in liquidity ated (the AMC, and entities it oversees, the IFC Capitalization needs in the marketplace. In addition, IFC launched a broad Fund and the Sovereign Wealth Fund) to help reduce potential range of crisis initiatives to mobilize capital from many orga- legal liabilities to IFC, and managers and staff have been hired nizations and address critical global needs in liquidity, bank- from outside IFC. Synergies are apparent--for example, invest- ing and finance, infrastructure, and agribusiness. ments are originated, processed, supervised and exited through The results of this effort are apparent in many dimensions, regular IFC investment operations. But there are also conflicts, including a continued strong portfolio; strong development real and perceived. The AMC manages and is responsible to the outcome (DOTS) results; expanded operations in IDA, Af- investors in its funds, while IFC is responsible to its Board mem- rica, and trade finance; and expanded advisory operations. bers. While co-investment is the objective going in, divestment In addition, fiscal 2010 commitment volume exceeded may take place at different times, leading to varying treatment 2009 levels for both IFC own account and mobilization, of the same client. IFC tends to be a long-term investor, while and growth is expected to continue in fiscal 2011, all this in funds generally have a more short-term perspective, which may an environment where global commercial finance remains lead to clashing objectives. Also, the funds are overseen by an quite constrained, with private flows in 2010 well below the entity (AMC) that has IFC's executive vice president and chief 2007 peak. Support for the initiatives totaled more than $11 operating officer as its chair, and some managers and staff can billion in fiscal 2010, including over $6 billion from IFC's move between the AMC and IFC, which present further poten- own account, $2 billion in direct support from partner gov- tial conflicts. Challenges related to fiduciary duties and corpo- ernments and IFIs through IFC, and $3 billion in parallel rate governance arrangements will need to be given constant financing arrangements. In addition, large and successful attention as AMC and IFC co-evolve." participation in regional initiatives, such as the Joint Action "[chapter 4, endnote 14] Mechanisms to manage potential Program for the banking sector in Central and Eastern Eu- conflicts include: i) That IFC co-invests in AMC-managed rope (which pledged $24.5 billion), have been instrumental funds and through joint investments; ii) the fund manager has in marshaling and coordinating action to address the crisis the capacity to accept or reject an investment offer by IFC; iii) from a wide range of players, well beyond what is accounted the establishment of procedures to handle conflicts of interest, for in IFC's own financial accounts. including that the advisory board of each fund (comprised of With respect to other IFIs, we have worked in concert with third party investors only) reviews conflict of interest situations that are brought to them prior to the related fund's investment many of these institutions, and coordinated activities are decision; iv) The AMC fund management team for each fund growing. Individual institution results reflect their different owes its fiduciary responsibility to the fund and is tasked with regional roles in the overall financial architecture. For ex- making independent investment decisions on each investment ample, in 2009 the EBRD greatly increased funding to the opportunity. However, these measures may together be insuf- Baltics and the more advanced countries in Central Europe, ficient to alleviate the perception of conflict of interest. such as Hungary, with most of the growth in loans, as the share of equity fell from 32 percent in 2007 to 15 percent Comments. The establishment of the AMC does not present in 2009. IFC, within the Joint Action Plan for Europe, con- a conflict of interest. Once the IFC management and Board Management Response | xxiii decided to move into the private equity fund management Comments. IFC has proven to be a more productive organi- business, the decision to form a separate legal entity to man- zation in recent years as the growth in new business and the age the funds business was a conscious one to (1) reduce portfolio has outpaced growth in expenses. While produc- possible legal liability to IFC and (2) address inherent con- tivity metrics peaked at the onset of the crisis and leveled off flicts of interest in a very transparent way. as the crisis unfolded and the recovery slowly commenced, figure 4.2 is misrepresentative of IFC's productivity. Includ- Like each fund that has been created as a separate legal en- ing several additional years prior to 2008 would give a more tity, AMC is also a separate legal entity. IFC's executive vice balanced view, as it would illustrate the trend of improving president is chairman of the Board of Directors of AMC, but productivity up to the peak of 2008. highlighting this fact alone is quite misleading. AMC has a chief executive officer and chief administrative officer who Advisory Services were hired from outside of the World Bank Group with spe- Analysis based on project approvals (page 39) does not offer cific expertise in private equity. The chief executive officer is real insight into the level or form of Advisory Services re- also a director, and there are two additional directors who sponse to the crisis. The experience of Advisory Services has are not employees of either AMC or IFC. AMC's board has been varied during this period. While some projects ground no decision-making role in investment decisions made by to a halt, others accelerated or had one component replaced AMC-managed funds. Of the 16 professional staff at AMC as by another more tailored to crisis priorities. Others were not of May 2010, 8 are outside hires. They are employees of AMC affected by the crisis and moved forward rapidly because of and have no legal right to become staff of IFC. The remain- other corporate priorities (such as climate change). In ad- ing AMC staff have been seconded to AMC from IFC on dition, shifts in numbers of project approvals are driven by external service via Staff Rule 5.02. The external service rules many factors, including launching of new multi-year cycles provide for a minimum secondment of two years, which is of multi-donor programs, most of which are organized on renewable for up to two additional years. a regional basis. Variations in this provide no insight into crisis response. Referring to co-investments: the understanding and expec- tation between IFC and its funds (and the investors in those M&E of Crisis Initiatives funds) is that they will invest and divest at the same time The report has a number of comments on the M&E for cri- and on substantially the same terms; nevertheless, each fund sis initiatives, for example, from page 67 ­ "Going forward, generally has an independent right to exit an investment monitoring and evaluation of the initiatives will need to separately from IFC, which is an important right, given that be made more systematic. Most of the new platforms were IFC tends to be a long-term investor. established with accompanying results frameworks, but these frameworks have focused more on funds mobilization and Presentation of Data financial targets than on achievement of development goals. Net Commitments. The report in several places, particular- Also, where development reach targets such as IDA concen- ly in the summary and on pages 37 through 39, addresses tration were considered, they were sometimes left to be deter- IFC activity during the crisis by looking at changes in net mined, as in the case of the bank capitalization platform. Or commitments over time. The use of net commitments is not targets have been set at a level that was less ambitious than the a meaningful measure of IFC new business operations or targets for IFC as a whole (20 percent of projects in the case of performance. Net commitment is an operational measure the ICF, versus 50 percent for IFC overall)." that provides a ready reference of current legal obligations of IFC to the client relative to the original commitment, and Comments. All the projects under the initiatives are very a measure for managing client accounts and supervision. By much regular projects under IFC's programs but done in a using it as a measure of new business, however, it distorts more scalable way. As such, the projects would fall in line IFC's performance in any fiscal year due to the inclusion of with IFC's extant M&E framework. Thus the conclusion of certain irrelevant items (for example, sales, transfers, con- the report that much of the funding for the crisis initiatives versions) and through the netting out of transactions that would be outside the IFC M&E framework to not correct. relate to different fiscal years (that is, cancellations during a Also, it would make sense that the emphasis at the margin is fiscal year refer to commitments over several fiscal years). on mobilization, as that is one of the key areas of differentia- tion for these initiatives. Productivity. Reference is made to IFC productivity on page 61 ­ "First, they [rapid organizational changes in the last few Food Prices year] have created career uncertainty and presented a distrac- There is a comment on food prices on page 61 ­ "Secondly, tion that has negatively affected productivity." the food crisis had the effect of raising food company profit- xxiv | The World Bank Group's Response to the Global Economic Crisis ability in a few cases, thus limiting the need of larger entities consistent and disciplined manner while managing the for financial support from IFC." heightened risks carefully and efficiently. It was important going into the response to have a process for ensuring that Comments. IFC's experience is that food company profit- MIGA maintained its view on the overall picture as well as ability did not improve during the economic crisis or during on individual projects coming through the underwriting sys- the food crisis. While this may have been the case for some tem. This has been important not simply for management, primary food (grains & rice) producers, nearly every seg- but also for MIGA's Board in order to be confident that risks ment IFC works with would have lower profitability because were being comprehensively assessed and that capacity was raw materials costs were higher and demand was lower due being prudently managed and shared. to any economic slowdown effects. As of the first quarter of fiscal 2011, MIGA has provided MIGA's Crisis Response 11 guarantees to 8 different banks seeking recapitalization from the Group parent in five different eastern European MIGA management thanks IEG for their report and wel- countries under the FSI, representing close to $1.5 bil- comes the chance to comment. As the report notes, "MIGA's lion in gross guarantee coverage. MIGA has also provided response to the crisis [has been] built around--but not limited support to two additional banks in the Europe and Central to--a new global Financial Sector Initiative that [has] focused Asia Region over this time period that did not fall under the initially on Europe and Central Asia." Indeed, this has been a FSI, representing a further $145 million in gross cover. The significant part of MIGA's overall business during the past two IEG report focuses on the figure of `up to $1 billion' in net fiscal years, 2009 and 2010. As the financial crisis took hold, guarantees that MIGA committed to provide to Europe and MIGA witnessed many of the more traditional projects that Central Asia through the FSI--however, the more important the Agency follows come under severe pressure, as financing figure to emphasize is in fact the $2­3 billion in gross cover- quickly became difficult to obtain and attitudes toward tak- age that MIGA announced publicly it would provide, which ing risk hardened drastically. As a consequence, while MIGA draws on the Agency's ability to arrange reinsurance. Indeed, entered fiscal 2009 with a robust and well-diversified pipeline of the nearly $1.5 billion in gross coverage issued, MIGA has of prospective new business, building on a record-setting year reinsured 44 percent. This is capacity that almost certainly in fiscal 2008, by mid-2009 the Agency was faced with a very would not have been available at the prevailing terms unless different situation, with almost all in-development projects ei- MIGA was fronting the deal. ther having being placed on hold or canceled outright. Considerable efforts have been undertaken by MIGA to Management would argue that MIGA actually played an strengthen business origination in the past 18 months. important counter-cyclical role. The deteriorating economic The report remarks that, "[a]s recognized before the crisis, environment brought forward demand for MIGA from West- but even more urgent now, MIGA needs to revamp and refo- ern European banks facing mounting problems maintaining cus its business development activities." Management would their subsidiaries in developing countries in the Europe and agree that historically developing new business has been chal- Central Asia Region. MIGA's operational priorities, as laid lenging for MIGA. This is in some respects an outcome of the out in its corporate strategy, call for the Agency to leverage fact that MIGA's business is entirely demand-driven--MIGA its comparative advantages by being a market leader in fron- is never in a position to be able to initiate a project. However, tier destinations where other political risk providers are less it is worth noting here that considerable efforts have been suited to operate. In more stable economic times, this typi- undertaken to address this problem, including many in the cally equates to the IDA countries. When the financial crisis past 18 months. There has been a considerable strengthening hit however, it represented a redefinition of the frontier aspect of MIGA's sectoral approach, including the hiring 18 months of the marketplace. MIGA was able to be effective in the Eu- ago of experienced sector team leaders and the recruitment rope and Central Asia Region for the same reasons it is cus- of new staff to fill key underwriting positions. Recognizing tomarily effective in IDA countries ­ (i) it is able to provide though that one of MIGA's constraints is its small size and longer-term coverage and (ii) MIGA's guarantees are backed the lack of a field network to conduct continuous outreach to by not just the weight of the World Bank Group name but prospective clients, a number of important steps have been also by MIGA's exceptionally strong balance sheet. MIGA has taken, including: first, in fiscal 2010 MIGA introduced an therefore been extremely well positioned to play a leading role Agents and Finders program, aimed at creating an external in responding to the crisis. network that is incentivized (on a success-fee basis) to bring The Financial Sector Initiative (FSI) provided a well forward projects for MIGA's consideration; second, MIGA thought through framework for being responsive in a has entered into an agreement with IFC to leverage IFC's Management Response | xxv global network of staff and client contacts to help identify been made over the past 18 months to MIGA's Operational new business opportunities for MIGA; and third, in fiscal Regulations (April 2009) and the pending amendments 2011, MIGA has put in place a small but experienced team to MIGA's Convention (which go into effect in November of staff in Asia to establish a presence in that region where 2010) are aimed at alleviating suboptimal process require- the market for political risk insurance is growing, and yet ments. In addition, MIGA has made major investments in historically MIGA has had a difficult time getting traction, its information systems technology, most notably introduc- in large part due to the constraints to building relationships ing a new Guarantees Database system at the end of fiscal resulting from physical distance. 2010, which will bring considerable benefit to the Agency in terms of being able to underwrite more efficiently, as well as As a result of these efforts, MIGA's pipeline of prospective strengthening MIGA's documentation and record-keeping new business today is considerably healthier than it has been capabilities and practices. at any time since fiscal 2008. The projects under consider- ation are well diversified in terms of sector, regional destina- At the same time, even while MIGA strives to operate ef- tion and size, and MIGA anticipates that this fiscal year will ficiently and minimize unproductive procedural steps, it is see year-on-year growth in new issuance. It is important to important to realize that processes are important, and that note though that there is consistently a lag between when MIGA's are inevitably going to be more rigorous and lengthi- the time when MIGA begins discussions with a client and er than those of most other political risk insurance providers the actual closing of a deal of, on average, approximately 18 in the market simply due to the fact that MIGA is a devel- months. And for infrastructure projects--an area of strategic opment institution. MIGA has to be satisfied that projects focus for MIGA--this lead time is considerably longer. So it under consideration meet the higher standards of the World is important to emphasize that the marketing and outreach Bank Group, and this is something that most clients are efforts of today will not yield immediate results. aware of going into a dialogue with the Agency. MIGA has taken notable steps to extend its product line. MIGA has paid five claims in its history; however only one The report also notes that, "For MIGA, the crisis has ampli- could be said to have occurred during a crisis. In the section fied the need for more product flexibility and enhancement of the report titled "Lessons from Past Crises," it is noted that of business development." While agreeing with the sentiment MIGA's risk-mitigation capacity "was tested by past crises, that MIGA needs to constantly monitor its product offerings during which two of the three claims in MIGA's entire history in order to maintain its relevance and be in a position to add were paid. Political risk--the mitigation of which is MIGA's value for prospective clients, it is important to highlight here mandate--is often heightened during crises, and infrastruc- the notable gains that have been made in recent months. Fol- ture projects that are inadequately structured or awarded in lowing the amendments made to MIGA's Convention and a nontransparent manner were particularly vulnerable to po- Operational Regulations, MIGA now has the ability to pro- litical risk events." In fact, MIGA has paid five claims in its vide a range of new coverages, including the Non-honoring history, however only one--a claim in Argentina for events of a Sovereign Financial Guarantee, Temporary Business in- that occurred in fiscal 2002--could be said to have occurred terruption, and stand alone debt. MIGA also has increased during a crisis: hardly enough to draw general lessons. Of the scope to support coverage on existing assets and to support other four, three were claims made under MIGA's war and investments relating to state-owned enterprises operating on civil disturbance coverage (in Kenya, Madagascar, and Nepal) a commercial basis. and one (Indonesia) was the result of a contract cancellation under expropriation coverage following a regime change. The past 18 months have seen a comprehensive internal review of MIGA's business processes that has led to no- table changes aimed at speeding up processes. The IEG Country Comments report notes that, "to improve its capacity to respond, MIGA As IEG undertakes the more comprehensive second-phase also needs to address several other internal constraints, in- evaluation of the World Bank Group crisis response, Bank cluding simplifying cumbersome business processes." Again, Group management would ask that it take into account ad- while management would agree that simplifying business ditional information regarding a number of findings of this processes is important, it is also necessary to underscore preliminary evaluation regarding the quality and effectiveness the work that has been conducted on this front. One of the of support to specific countries, and notably support to the most important elements has been a streamlining of internal financial sector. Some of the issues raised may be related to approval processes to reduce processing costs and overall the fairly limited quality-at-entry methodology used by IEG, turnaround time. In addition, many of the changes that have which focused on the quality of the results matrices of the xxvi | The World Bank Group's Response to the Global Economic Crisis operations evaluated. Based on this analysis, it is premature gary. The slowness in response (because of the loan pricing to conclude that there might have been compromises in qual- issue) should be considered separately from the quality and ity. We hope that the following country-specific information design of the operation. The Hungary DPL was carefully de- provides useful input for the next phase of the evaluation. signed and contained several best practice results-monitoring indicators (as confirmed in the IEG evaluation). The quality Brazil of the in-depth analysis was commended at the Board discus- Bank management believes that further information would sions, and the borrower implemented all the policy measures result in a different conclusion than that in table 4.1, page laid out in the Program Document. The banking components 50 of the IEG evaluation, where it is stated that the results included high-quality, innovative financial regulations to frameworks for the selected Brazil DPOs display "weak re- tackle the crisis and were supported by in-depth AAA/sec- alism on core environment issues." In particular, manage- tor analysis discussed in the Program Document and which ment does not see the federal environmental management counted on the same team that had worked since 2005 on focus as weak on core environmental issues. The program the FSAP and financial and pension reforms. Bank assistance supported by the Sustainable Environmental Management added value above and beyond the IMF/EU reforms and sup- (SEM) DPL embodies concerted efforts by the government ported strong reform actions completed in the pension and to strengthen environmental management on deforestation, banking areas. Collaboration with the IMF was outstanding climate change, and water resources (as clearly reflected in and there were no issues of friction. the result framework of this DPL series). These efforts in- clude long-term planning supporting Brazil's efforts to un- India dertake a transformational change and achieve a balance Box 4.4 in the IEG evaluation acknowledges the comprehen- between command and control measures and initiatives that sive nature of the Indian response and Bank support to the promote good environmental practice through incentives. crisis. However, management believes that important addi- Management believes that a more careful consideration of tional information is available regarding the Banking Sector the results framework put together by the Brazilian authori- Support Loan. The government's economic stimulus pro- ties for the SEM DPL will show clearly that the SEM DPL gram, which contained a number of fiscal, monetary, trade, program is strong on environmental issues. and financial measures, included a plan to provide additional capital to these banks. This was to enable banks to maintain Europe and Central Asia Countries credit growth at levels that would support desirable rates of On page 61 there is a discussion of IFC's investment ap- economic activity, employment, and inclusion, as lending by proach in a number of countries, with a specific reference foreign banks registered absolute reductions while domestic to the Europe and Central Asia Region ­ "However, commu- private banks sharply reduced the growth of their lending. nications to the field were also not clear: messages about IFC's However, the operation was not a bank recapitalization loan. countercyclical role were combined with signals to limit new It provided general budget financing to the Indian govern- lending, protect the portfolio, and focus on the new initiatives ment for its overall economic stimulus program and against as source of new capital. It took some time for new business a set of policy and institutional actions. It did not specify development, especially in ECA, to be restored." In the case the use of the proceeds of the DPL for capital injections into of IFC's activities in Central and Eastern Europe, business public sector banks. Because of strong prior work, the opera- development slowed down because business in general prac- tion was able to draw on a well-developed financial sector tically stopped, rather than due to reasons cited above. The reform program, which was endorsed by the IMF and the companies postponed or canceled their expansion plans, Bank, described in the FSAP Self-Assessment, and support- large infrastructure projects were put on hold; the banks ed by other existing AAA. were assessing their non-performing loan levels and con- ducting stress testing. The overall environment at the peak Indonesia of the crisis was not conducive to new business. Neverthe- There is discussion of IFC operations in Indonesia on page less, even under these circumstances, IFC invested $1 billion 59 ­ "The approach in Indonesia was similar [to the one in in Central and Eastern Europe in fiscal 2009, and more than Mexico]. Here, non-performing loans were reduced to less than $1.45 billion in fiscal 2010, which represents IFC's highest 1 percent, as they were in Mexico, but new investments fell by volume ever in Central and Eastern Europe. more than a quarter between FY08 and FY09." One impor- tant explanation for the results in this region is that clients in Hungary many cases did not have large financing needs. Apart from a Bank management would like to provide additional informa- few months where dollar financing was difficult, liquidity was tion regarding the IEG assessment of Bank support to Hun- adequate to support the crisis period since exports declined, Management Response | xxvii which limited working capital requirements and market un- Nigeria certainty limited investment in capital expenditures. IEG reasons that the Nigeria DPO "did not address the on- going deterioration of the banking sector. The Bank had more Mexico limited operational engagement in the financial sector in Nige- Management would ask IEG to also take into account in the ria than in Indonesia, although staff had maintained an active next round additional information concerning the World dialogue with the Central Bank of Nigeria, focused on several Bank loan to Mexico's Sociedad Hipotecaria Federal (SHF). issues related to credit and portfolio quality and banking su- The report states that the loan "repeats the problems of past pervision and regulation." It later states that "early indications financial sector loans." Management notes that the structure based on quality-at-entry considerations raise questions about and purpose of the loan are substantially different from pre- likely results, and in some cases point to major risks, for Bank- vious operations. While SHF does lend to other institutions, supported financial sector reforms...the Nigerian financial the Mexico SHF loan is not a standard financial intermedia- sector DPO focused more narrowly on international finan- tion (credit line) operation. Indeed, the loan was designed cial reporting standards and risk-based supervision when the with the lessons of previous IEG evaluations firmly in mind, country's financial system was under serious threat of a finan- including problems of slow disbursement of credit lines, the cial crisis." doubtful demand for the funds in the private sector, and the need for strong institutions. The difference in structure of Management would ask IEG to take into consideration in the SHF loan goes beyond just an alternative disbursement the next round the analytical work undertaken by the Bank mechanism. The increased financial capacity of SHF is to be in recent years, as well as policy recommendations and the used for expanding credit for well-established loan products. measures implemented by the Central Bank of Nigeria dur- The philosophy is to support a development bank that has a ing that period. As early as January 2008--as part of ongoing clearly defined market development role, but which is also diagnostic work in relation to the Nigerian Financial System serving a market stabilization function during the crisis, Strategy 2020--the Bank drew attention to looming imbal- while supporting it in advancing into new areas of market ances in the Nigerian financial system and highlighted a development following the crisis. number of reform priorities, the first of which were to "mon- itor banks' investment in equities both on their own balance IFC performance in Mexico is also mentioned in the report, sheet and on those of their subsidiaries" and to "introduce particularly on page 59, "In Mexico the corporate focus on consolidated banking supervision." In subsequent months portfolio protection and high selectivity in new investments, to- the Bank did indeed highlight a number of serious deficien- gether with substantially increased pricing during the crisis pe- cies in bank accounting, reporting, and disclosure, and, real- riod worked against the country team's efforts to support top-tier izing the urgency of the situation, the Bank recommended companies and global leaders in distress, as well as healthy me- that a thorough "health-check" of the banking system be un- dium-size companies looking for equity." In Mexico, the reduc- dertaken by international auditors. tion in commitments between fiscal years 2007 and 2009 was due in part to a conscious effort to increase activity in Central In conducting the policy dialogue and preparing the Nigeria America, and particularly in IDA countries, Honduras, and DPO, the Bank focused on the need for structural reform in Nicaragua. Central America, with a similar strong dependence bank reporting and accounting practices and strengthened on the U.S. economy as Mexico, was hit hard by the crisis. In- supervision rather than providing funding to support bank creasing IFC staff resources for Mexico would have come at the recapitalization. In doing so, the Bank was following advice expense of Central American countries. While higher prices espoused by the IEG's own evaluation of the Bank's financial were not favorable for crisis moments, IFC was one of the few sector work. The Central Bank of Nigeria did indeed act on institutions willing to go long-term in several countries, and in the advice the Bank had provided almost a year earlier. Prior fact had several deals in the region, where under normal times, to the Board discussion of the DPO, the Central Bank initi- clients would have gone to the market. In addition, fiscal 2010 ated special audits of the first batch of 10 (of 24) Nigerian commitments in Mexico are the highest in the last five years. banks and identified significant liquidity and solvency risks While it is true that commitments in Mexico dropped by 65 in 9 of the banks. Based on these findings, the Central Bank percent between fiscal 2007 and 2009, commitments in Central took immediate and decisive action against the banks' man- America increased more than tenfold. Overall, commitments agers, shareholders, and delinquent debtors. The authorities in Mexico and Central America almost tripled between fiscal have also moved forward to establish a robust legal and regu- 2007 and 2009. While there was demand for IFC's services in latory framework in the form of the Asset Management Cor- Mexico, we focused our resources where we believed we would poration of Nigeria to resolve the situation of the troubled have a stronger development impact. banks. xxviii | The World Bank Group's Response to the Global Economic Crisis Chairperson's Comments: Committee on Development Effectiveness (CODE) On September 27, 2010, the Committee on Development Ef- and quantitative aspects of the Bank Group response; track fectiveness (CODE) considered the report, The World Bank the quality-at-entry of investment lending; and enhance the Group's Response to the Global Economic Crisis Phase I, pre- results framework and monitoring and evaluation capacity. pared by the Independent Evaluation Group (IEG), and the Looking forward, members stressed the importance of con- Draft Management Comments. sidering the financial headroom of the Bank Group to engage with different categories of clients (for example, MICs) and Summary continuing support to core sectors, including to maintain the Bank's capacity in the financial sector as one of the pillars of The Committee welcomed the Phase I IEG "real time" evalu- ation, which assessed the World Bank Group response to the post-crisis directions. the crisis, focusing on developments since 2008, and draft Management Comments. While noting that IEG findings are Recommendations and Next Steps early in nature, and will be followed up by more in-depth The Committee recommended a full Board discussion of the analysis as more data become available, the evaluation gener- IEG report and Management Comments given the relevance ated an interesting discussion on a number of issues for close of the early lessons to be drawn. watch going forward. Members stressed the importance of drawing early lessons, including those on crisis prevention, Some suggestions for the Phase II report were to build on the the countercyclical role of the World Bank Group, and ade- preliminary outcomes of Phase I activities and add country quacy of instruments and analytical and advisory services, as data and operational results from Implementation Comple- well as the Bank's graduation policy. They also commented tion Reports; present data on disbursement and commit- on the need to prioritize the Bank Group interventions and ments by countries and Regions; assess the impact of front- to strengthen coordination within the Bank Group and with loading IDA resources; and focus on the results framework other development partners. of crisis response actions. IEG acknowledged the problem of the recent discontinuation of a tracking system for the qual- Members highlighted the need to integrate Bank Group cri- ity-at-entry of projects in the early phase of implementation; sis support with a medium- and long-term development per- inputs on the issue will be sought at the upcoming Board spective and a focus on poverty reduction and to consider discussion. the impact of new initiatives in the crisis context, given the specific targets of these initiatives and their complementarity to existing established programs. They commented on the rel- Main Issues Discussed evance of the crisis response evaluation from both policy re- IEG Report. There were questions on whether there was sponse and organizational effectiveness aspects, and in terms feedback from client countries and from other IFIs and how of preparedness and timeliness of response, while taking into to assess the Bank's performance in its role as a knowledge account the financial adequacy of Bank Group and client in- broker in the context of the crisis. Some members noted stitutional capacity. There were also questions on how to cre- important aspects of the crisis response that deserve fur- ate new opportunities for crisis response under the current ther IEG analysis, including the quality of policy advice and staff incentives and matrix structure, flat budget constraints, investment lending operations, and, above all, additional fi- and the ongoing decentralization initiative. nancing, signals to the market (for example, through DPLs Members underlined the need to capitalize on linkages be- and DDOs), the complex tradeoff between counter-cyclical- tween public and private sector support; consider qualitative ity and long-term development challenges, and the response Chairperson's Comments | xxix of IDA. On the last, the need for a more evidence-based (cases of Hungary and Latvia) should be considered in fu- and quantitative analysis about its possible constraints was ture graduation policy discussions. stressed, also with a view to informing the IDA16 replenish- Instruments. Several speakers noted the IEG recommenda- ment discussion. One member objected to the description in tion that a wider array of instruments, including more crisis- the report of the implementation of one of IFC's new initia- tailored shorter-maturities instruments, would have helped tives. in the crisis response. Some speakers suggested that a new Country Focus. Questions were raised about how the need instrument for countercyclical financing should be consid- for crisis response was balanced with support for stronger ered in the context of the review of all instruments, and one social safety nets, and whether the Bank's response to the cri- expressed the view that it might have higher pricing. Other sis was tailored to address countries' specific needs based on speakers noted that this was not the appropriate setting for the quality of their institutions or level of development. In its the discussion of pricing. A question was raised on how to evaluation, IEG found that given the information available address preparedness and readiness of new instruments, in- in many countries, by design, crisis response programs were cluding contingency lines that clients may not be willing to usually pro-poor. Management noted that the Bank Group demand to avoid signaling vulnerability to the market. assistance was supported by existing country knowledge and Organizational Issues. There were questions on whether the strong partnership. current staff incentives and matrix structure create opportu- Graduation Policy. It was noted that the Bank's response nities to improve the Bank's efficiency and effectiveness and and its countercyclical role should be defined with some whether due attention is being paid to the quality of field clarity relative to its graduation policy. It was proposed that service and presence in the context of the ongoing decentral- the Bank's continuous engagement with graduated countries ization initiative in the Bank and IFC. Giovanni Majnoni, Chairman xxx | The World Bank Group's Response to the Global Economic Crisis Chapter 1 In the past two years, the world has faced its most severe economic crisis in living memory, a trial that has threatened to set back years of progress on growth, job creation, and poverty reduction in developing countries. Though the crisis began in the financial sector in the developed world in mid-2008, it spread quickly to many developing countries, particularly affecting the countries most connected to the global economy through the channels of trade, investment, and worker remittances. Photo courtesy of Curt Carnemark/World Bank. Evolution of the World Bank's Gender Policy | 1 Introduction Objectives In the past two years, the world has faced its most severe economic crisis in living mem- ory, a trial that has threatened to set back years of progress on growth, job creation, and poverty reduction in developing countries. Though the crisis began in the financial sec- tor in the developed world in mid-2008, it spread quickly to many developing countries, particularly affecting the countries most connected to the global economy through the channels of trade, investment, and worker remittances. The World Bank Group is responding to this crisis through executive directors and management through several in- various means: increased lending by the World Bank, par- formal communications: a note summarizing progress with ticularly through the International Bank for Reconstruction the evaluation work at the time of the October 2009 Annual and Development (IBRD); crisis-response initiatives by the Meetings, an Evaluation Brief in November 2009 that was International Finance Corporation (IFC) in trade finance, discussed in the Committee on Development Effectiveness infrastructure, bank capitalization, microfinance, distressed (CODE) in January 2010 (IEG 2009c), and a further progress asset management, and advisory services; and a Multilateral note for the Spring 2010 Meetings. Investment Guarantee Agency (MIGA) global financial sec- The detailed objectives, evaluation questions, and methodol- tor initiative. Together, these actions are expected to exceed ogy for the evaluation were set out in the Approach Paper $100 billion in additional finance to developing countries by submitted to CODE in September 2009 (IEG 2009a). The is- the end of fiscal 2011. sues addressed in this first report are: preparedness in terms The purpose of this ongoing evaluation is to review and as- of economic analysis and strategic readiness, relevance of the sess the Bank Group response to the crisis, focusing on de- response, quality of implementation, and early outcomes and velopments since mid-2008, and to draw lessons to enhance prospects. At this early stage, it is not possible to fully evalu- the impact of continued actions by the Bank Group and oth- ate outcomes and impacts. The discussion of outcomes and ers. The evaluation is being carried out jointly across all three impacts will be expanded (and possibly revised) in the sec- IEG units (World Bank, IFC, and MIGA) to provide a com- ond evaluation report, in 2011. prehensive perspective on the World Bank Group response. The effectiveness of the Bank Group's response to this crisis Evaluation work is taking place over a two-year period, and is assessed with reference to various benchmarks, including: findings will be presented in two main reports, of which this Bank Group performance before this crisis (including during is the first. past crises); Board and management expectations of the Bank The evaluation provides real-time feedback1 aimed at im- Group's activities, role, and impact in this crisis; country and proving ongoing crisis-response efforts, while also providing sectoral crisis needs; and the response of other international accountability for activities carried out to date and helping financial institutions (IFIs) (plus commercial investors in the prepare for future crises. It builds on, and follows, a 2008 case of IFC and MIGA). Independent Evaluation Group (IEG) report examining les- sons of Bank Group interventions during past crisis episodes Evaluation Issues and Questions (IEG 2008a). In line with the key evaluative questions listed in the Ap- This evaluation report summarizes findings from portfolio proach Paper, this report addresses, to the extent possible at reviews for each Bank Group institution, background papers this time, the following issues: on the crisis and the crisis response, and detailed reviews of the Bank Group response in 11 country case studies. IEG has · Preparedness already provided initial evaluation findings to Bank Group ­ Economic analysis: Did the Bank Group's forecasts 2 | The World Bank Group's Response to the Global Economic Crisis (in global reports and country analyses) anticipate · Implementation the crisis or some variation of it? ­ Speed: Was the Bank Group able to carry out cri- ­ Strategic readiness: Did the Bank Group have in sis-related interventions in a timely and effective place, or was it in a position to quickly mobilize, manner? Is the Bank Group appropriately han- the requisite knowledge, staffing, budget resources, dling any tensions between speed and quality? and financing to respond quickly to client needs? ­ Financial capacity: To what extent did financial · Relevance capacity constraints affect the size, composition, ­ Needs assessment: How well have the needs of and implementation of the Bank Group response? crisis-affected countries been assessed (and were ­ Partnerships and coordination: How effective they reassessed as the crisis unfolded)? Have vul- was the coordination among key partners? Did nerabilities been adequately mapped to actions the country governments have sufficient "ownership" Bank Group could take? Has the Bank operational of Bank Group programs and initiatives? model, based on country strategies and country ­ Internal organization: How did operational guide- demand, taken into account the differential abili- lines, policies, and procedures affect the degree of ties of countries to assess their needs and prepare preparedness, intersector and interunit coordina- requests for assistance? tion, timeliness of response, and appropriateness ­ Resource allocation: Was the focus of the re- of instruments? What other internal factors, for- sponse on the countries and clients most in need mal or informal, supported or impinged on imple- of support (that is, those most affected by the crisis mentation? and with the greatest financing gaps)? What have ­ Monitoring and evaluation: Did the Bank Group been the relative roles of country demand and the establish clear results targets for its response and Bank's assessment of country needs and desirable systems to monitor implementation speed and resource allocation (supply aspects)? quality? Are adequate learning mechanisms in ­ Choice of instruments: Have the existing and place to provide feedback and enhance results? newly established instruments and platforms been relevant to the needs? How have credit enhance- · Early Outcomes and Prospects ment mechanisms been used in responding to the ­ Meeting objectives: Are the Bank Group's ob- crisis? jectives for the crisis response on track to be achieved? ­ Focus on poverty impact: To what extent did the Bank Group response maintain a strong focus on ­ Effectiveness of instruments: How effective have poverty reduction and the most vulnerable? particular delivery mechanisms been (main pro- grams across the Bank Group units)? ­ Focus on infrastructure: To what extent have long-term infrastructure programs been protect- ­ Additionality: Are clients and stakeholders satis- ed? fied with the quality and timeliness of Bank Group contributions? Did the Bank Group provide servic- ­ Role of the Bank Group in the international es that clients would otherwise not have received? aid architecture: Were the Bank Group's actions complementary to those of others, including gov- ­ Debt sustainability: Are country debt burdens ernments, other IFIs, and the private sector? Were sustainable? To what extent did the Bank Group the actions consistent with the Bank Group's com- consider country absorptive capacity and future parative advantage? Given the size of Bank Group debt-service capacity? financing relative to the overall financing gap, did ­ Indirect effects: Is the response having any unin- the Bank Group effectively leverage its role for tended consequences? Is the response likely to have maximum relevance? a material impact on the global aid architecture? Introduction | 3 Methodology Partnership arrangements, 1 year into the 30-year contracts (U.K. National Audit Office 2004). The evaluation remains Methodological Approach firmly evidence-based, while focusing more on outputs and This real-time evaluation of the Bank Group response to the outcomes than on impacts. global economic crisis is similar in most respects to other Global and Country-Level Evaluation IEG evaluations, except for its timing. As is normally the While the crisis has been global, countries experienced dif- case, the evaluation uses a mixed-methods approach. It ferent circumstances and challenges, and responses by devel- combines literature and document review, semi-structured opment institutions had to be country-specific and tailored and in-depth interviews, surveys, program and project to these challenges. Thus, the ongoing evaluation assesses analyses, and country case studies. It also examines perfor- both the global and country-level aspects of the World Bank mance against stated Bank Group objectives (at the global, Group's response. program, country, and operation levels), using IEG's normal evaluation criteria. Global Response. At the global level, the evaluation consid- ers, first, the level of preparedness of the Bank Group and the The evaluation relies on evidence from ex-post assessments relevance of specific programs and initiatives introduced or of completed activities. For example, the preparedness of the expanded in response to the crisis. The relevance of the pro- Bank Group was examined based on actions the Bank Group grams--and of the overall Bank Group response--is evaluat- took leading up to September 2008, when the financial crisis in ed in the context of the Bank Group's role in the international advanced economies became a global crisis. Similarly, the rel- aid architecture. The evaluation then assesses implementation; evance of Bank Group objectives is assessed in relation to coun- that is, progress in the delivery of these programs and initia- try needs at the time the objectives were established. In each tives, including lending and knowledge-based activities, in re- case, the quality of Bank Group action can be compared with lation to the established objectives. Some aspects of this prog- responses to past crisis episodes, to actions in non-crisis peri- ress have already been reported in the previous two informal ods, and to interventions by other IFIs in reaction to the crisis. reports (IEG 2008a, 2009c), and additional information and The ongoing evaluation has involved preparation of back- assessments are included in this (formal) report. Implementa- ground evaluations of specific components of the crisis tion continues, however, and a more complete assessment of response (for example, on specific programs, countries, or progress will be presented in the next formal report. operations) and has relied on other freestanding evaluations The assessment of implementation looks into each of the of relevant activities, much as sector evaluations use find- operational components of the response (across the World ings from project evaluations in the sector, and country as- Bank, IFC, and MIGA) and evaluates them separately, as sistance evaluations use findings from a variety of individual well as considering issues of coordination across the Bank evaluations for a country. Group. Cooperation with the International Monetary Fund The main difference in this evaluation is in its timing. Giv- (IMF) and regional development banks is also assessed and, en the importance of the issues addressed and the need for to the extent possible, the evaluation incorporates the views timely feedback to the Bank Group's executive directors and of these partners on the Bank Group response, as well as the management, the evaluation started during implementation views of country stakeholders. of the activities being evaluated, but about one year after Country-Level Responses. Country-specific responses are the first responses to the crisis were introduced. This means assessed selectively, based on several criteria, including im- that the evaluation and its subject matter (objectives, instru- pact of the crisis and/or importance of the Bank Group re- ments, delivery mechanisms, outputs, and outcomes) are sponse (in terms of impact or resources invested pre- and evolving simultaneously. post-crisis). A broad mix of country types is covered (mid- The evaluation is thus, to some extent, formative in its early dle-income countries, lower-income countries, and fragile phase. Its intention is to help improve program performance states), including countries where the Bank Group response by informing decisions about relevant programs and their included a range of instruments to achieve a broad coverage component parts and processes.2 Examples of formative of all available instruments, and countries with early Bank evaluation work carried out by other organizations include Group interventions in response to the crisis, to maximize the U.S. Government Accountability Office's ongoing bi- the availability of evaluative evidence (although evaluation monthly reviews of progress with the U.S. stimulus plan (U.S of "late responses" will also be important to assess the evolu- GAO 2009) and the U.K. National Audit Office's evaluation tion in the responses to the crisis). Although the lending in- of progress with the London Underground Public-Private crease was initially largely directed to middle-income coun- 4 | The World Bank Group's Response to the Global Economic Crisis tries, the selection also includes International Development countries, including IEG staff visits.3 The next stage may in- Association (IDA) countries. clude additional country-level work. The findings from the 11 country notes have been incorporated in the relevant sec- Based on the above criteria, the first stage of the evaluation tions of chapters 3 and 4 of this report. has already included the preparation of country notes for 11 Introduction | 5 Chapter 2 In the three years since 2007, the world economy has been hit by a series of overlap- ping crises. The first was financial: an appar- ently local crisis in the subprime mortgage market in the United States. This gradually extended to the financial sectors of other developed countries, and then turned into a global financial crisis. This, in turn, generated a global economic crisis, which affected most countries, both developed and developing, with varying degrees of intensity. Photo courtesy of Yosef Hadar/World Bank. The Global Crisis and Its Impact on Developing Countries Overview In the three years since 2007, the world economy has been hit by a series of overlap- ping crises (figure 2.1). The first was financial: an apparently local crisis in the subprime mortgage market in the United States. This gradually extended to the financial sectors of other developed countries, and then turned into a global financial crisis. This, in turn, generated a global economic crisis, which affected most countries, both developed and developing, with varying degrees of intensity. Prior to the financial crisis, and partly in parallel with it, August 2007, as leading Wall Street firms such as Bear there was a period of global food and fuel price increases. Stearns, Merrill Lynch, JP Morgan Chase, Citigroup, and These price increases worsened the subsequent recession- Goldman Sachs reported major losses.1 Economic activ- ary impact of the financial collapse. The combined effect ity slowed as credit conditions tightened, and advanced of these events--in social and economic terms--has been economies fell into mild recession by mid-2008. Emerg- widely assessed as the most serious and potentially devas- ing and developing economies continued to grow at fairly tating that the world has experienced since the Great De- robust rates, because they had limited exposure to the U.S. pression. subprime market. However, despite policymakers' efforts to sustain market liquidity and capitalization, concerns Globalization of the U.S. Financial Crisis about losses from bad assets continued to raise questions about the solvency and funding of core financial institu- The real estate and subprime lending crisis in the United tions with global reach. States deepened into a financial crisis in the advanced economies in mid-2007. The loss of investor confidence The situation deteriorated rapidly and escalated into a in the value of securitized mortgages revealed itself in global economic crisis in September 2008, following dra- gure 2.1 FIGURE 2.1 Crisis Chronology, 2007­10 8 | The World Bank Group's Response to the Global Economic Crisis matic collapses in the financial market. Large losses in the Impact of the Crisis on Developing banking and financial sectors resulted in a liquidity crisis Countries that rippled across the Atlantic through financial channels. Stock markets worldwide tumbled and entered a period of Early indications of the crisis were sharp drops in pri- high volatility, and numerous banks, mortgage lenders, and vate capital flows and international trade. What was insurance companies failed in the following weeks. To avoid seen originally as a U.S. financial sector crisis spread to a complete meltdown, the United States Federal Reserve, the other economies through finance and trade channels. Fall- Bank of England, and the European Central Bank injected ing international demand led to declining exports from substantial capital into financial markets. emerging economies. Meanwhile, private capital flows to developing countries dropped rapidly, from a peak of Overlapping with the transformation from the initial U.S. around $1,200 billion in 2007 to $752 billion in 2008. This financial crisis to the global economic crisis was a major reflected the liquidity squeeze in advanced economies, increase in food prices, higher energy prices, and a block- which led investors to pull back from emerging markets. age in global trade. Triggered by declining global stocks of many food commodities, the food price index peaked in Risk aversion prevailed in 2009, as investors sought to June 2008, but gradually dropped as the global economic rebuild their balance sheets, and capital flows dropped crisis unfolded in the third quarter of 2008. Energy prices further, to $454 billion (World Bank 2009e). In parallel, also fell back as the crisis took hold. While food prices in commodity prices fell, and several countries faced lower world markets have generally continued to decline, domestic remittances.2 Private capital flows are showing signs of re- prices in developing countries have eased more slowly, and bounding in 2010, to a projected $590 billion, a 30 percent in some cases have recently increased. The dangerous mix increase (World Bank 2010c). Figure 2.2 clearly shows the of the global economic slowdown and stubbornly high food v-shaped pattern in private investment in the crisis period, prices in many countries has pushed an estimated 100 mil- which has been driven by flows to middle-income countries lion people into undernourishment and poverty (Tiwari and (MICs), especially portfolio equity seeking higher yields and Zaman 2010). commercial bank debt. gure 2.1 FIGURE 2.2 Private Capital Flows, 2006­10 Sources: World Bank, Economist Intelligence Unit. Note: Based on calendar year data, 2006­10. Private capital inflows are the sum of FDI (foreign direct investment), portfolio equity, and debt inflows from private creditors. The Global Crisis and Its Impact on Developing Countries | 9 The crisis has affected advanced and emerging economies of less than 2 percentage points. At the individual-country more than low-income ones. The advanced economies ex- level, the range of impacts is even starker: some countries perienced an unprecedented 7.5 percent decline in real gross experienced GDP declines of more than 15 percent in 2009 domestic product (GDP) during the last quarter of 2008, and (Latvia, Ukraine), while in others GDP growth continued at output continued to fall quickly during the first quarter of a healthy rate, even if slower than before the crisis (China, 2009. Emerging economies (or MICs) as a whole contracted Indonesia). by 4 percent in the last quarter of 2008, and this trend con- The reasons for the differential impact of the crisis include tinued in the first quarter of 2009, while low-income coun- countries' starting conditions in their fiscal and external tries (LICs) felt limited direct impact, given the weaker link- balances and the specifics of trade and finance channels. ages of these economies to the global economy. Overall, it appears that the countries' own policy stance at the After a deep global recession, economic growth gradually outset and during the crisis was the dominant factor. Coun- turned positive in many developing countries, starting in tries with good fiscal and external balances performed better the second and third quarters of 2009, but uncertainty re- than countries where the external shock came on top of weak mains. These developments are the result, in part, of wide- fiscal policies and high indebtedness (see below). An excep- ranging stimulus packages that have supported demand and tion to this pattern was Mexico, where geography (closeness other government actions that reduced uncertainty and sys- and high dependence on exports to the United States, as well temic risk in financial markets. The data for the last quarter as remittances) trumped policy, and the result was a major of 2009 and the first quarter of 2010 also showed a continu- decline in economic activity, in spite of good macroeconomic ation of the recovery, with more developing countries expe- performance before the crisis. riencing increased growth. This has led many observers to Regional Developments and Prospects conclude that the crisis is over, although there remain nu- In spite of the differences across countries, there were merous risks that will need close attention in coming years. similarities within any given Region. For example, the se- High fiscal deficits and increased indebtedness, especially verity of the crisis in Eastern Europe and Central Asia was in the advanced economies, are a cause for concern and much greater than in East and South Asia (table 2.1). Also, are leading some countries to roll back stimulus. Events Latin American and Caribbean countries appear to have suf- in Europe during the first half of 2010 (such as the crisis in fered a more severe impact than would be expected, given Greece--closely related to high indebtedness and fiscal defi- their good policy stance going into the crisis. The rest of this cits) have reintroduced fears of contagion and have affected section summarizes some of these characteristics at the Re- markets worldwide. The slow recovery in the main industri- gional level.3 alized countries appears to be holding for now (evident in Eastern Europe and Central Asia. Preexisting vulnerabilities first-half growth in the United States and Europe), although in the countries of this Region, including large current ac- a new set of macroeconomic problems is emerging. In these count deficits, excessive reliance on foreign capital to finance circumstances, timing of stimulus rollback is a central ques- domestic consumption, and sizable fiscal deficits in some tion, for advanced and emerging economies alike. Some countries, exposed the Region to a particularly sharp adjust- countries, such as Mexico and a number of Euro-area coun- ment when international sentiment reversed with the onset tries, have already begun to reduce their fiscal stimulus, with of the crisis. Faced with dramatic tightening of external fi- more widespread fiscal tightening expected in 2011 (World nancing conditions, governments responded with a mix of Bank 2010c). domestic macroeconomic adjustment initiatives and exten- Differences in Impact: Policy and Geography sive resort to the IMF, the World Bank, and the European The impact of the crisis has varied widely among develop- Union to enhance foreign exchange reserves, support bud- ing countries and regions. A review of the impact on the getary expenditures, and resist downward pressure on local Bank's main borrowing countries shows that 29 countries currencies. Even with these efforts, the crisis hit the Region hardest of all developing Regions. suffered a severe impact: GDP growth rates fell an average of more than 5 percentage points between 2006/07 (the pre- Recovery is expected to remain weak, given the need for crisis period) and 2008/09 (the crisis period). For another 36 substantial adjustment in domestic demand and the exten- countries, the impact of the crisis was moderate, with GDP sive financial sector weaknesses. Continuing problems in the growth rates falling between 2 and 5 percentage points, and banking sector, remaining external financing constraints, in 51 countries the impact of the crisis was small, with a drop and vulnerable household and corporate balance sheets have in GDP growth between the pre-crisis and the crisis periods limited the speed of recovery in the hardest-hit economies 10 | The World Bank Group's Response to the Global Economic Crisis TABLE 2.1 Growth Projections (percent) Economy/Region 2007 2008 2009 2010a 2011a World output 39 1.7 ­2.1 3.3 3.3 Advanced economies 2.6 0.4 ­3.3 2.3 2.4 Developing economies 8.1 5.7 1.7 6.2 6.0 East Asia & Pacific 11.4 8.5 7.1 8.7 7.8 Europe & Central Asia 7.1 4.2 ­5.3 4.1 4.2 Latin America & Caribbean 5.5 4.1 ­2.3 4.5 4.1 Middle East & North Africa 5.9 4.2 3.2 4.0 4.3 South Asia 8.5 4.9 7.1 7.5 7.8 Sub-Saharan Africa 6.5 5.0 1.6 4.5 5.1 Source: World Bank 2010d. a. Forecast. of the Region. These factors, combined with higher inter- The recession had bottomed out by mid-2009 for many est rates and weak international capital flows, are likely to economies in the Region. External demand rebounded faster dampen growth in investment and consumption. Overall, and more strongly than initially anticipated in the second growth performance in the Region is expected to be modest. half of the year. GDP is projected to grow at over 4 percent The Bank forecasts 4.1 percent growth in 2010 for Eastern annually in 2010 and 2011, although prospects vary con- and Central European countries. siderably across countries. The recovery is projected to be especially strong in many commodity-exporting, financially Latin America and the Caribbean. The Region's sound mac- integrated economies, which account for about two-thirds roeconomic fundamentals in the pre-crisis period allowed of the Region's GDP. This group includes Brazil, Chile, Mex- it to weather this crisis much better than it had the crisis of ico, and Peru. Growth prospects are more subdued in other the late 1990s. Yet the impact of the crisis was substantial. commodity-exporting economies in the Region, including Economic activity contracted in the fourth quarter of 2008 Paraguay and Venezuela. and in the first half of 2009 as consumption, investment, and exports fell sharply. This was the result of tighter external Sub-Saharan Africa. After a decade of strong economic financing conditions, deterioration in the Region's external performance, growth in Sub-Saharan Africa slowed to 1.6 demand, and lower workers' remittances. The deterioration percent in 2009, with zero or negative per capita income in economic activity varied across the Region and depended growth. The global economic recession slashed the exports mainly on the nature and intensity of external shocks and of many Sub-Saharan countries and disrupted capital flows. country-specific characteristics. For example, the decline in Oil exporters (such as Angola), commodity exporters (such workers' remittances and tourism earnings severely affected as Botswana and Zambia), and MICs (such as South Africa) economies in Central America and the Caribbean. have been particularly hard hit; LICs somewhat less so. Nev- ertheless, relatively better macroeconomic policies during Net commodity exporters, including the Region's largest the pre-crisis period provided space for domestic economies economies (Argentina, Brazil, Colombia, Mexico, Peru, and to absorb some of the external shocks, supported by specific Venezuela), suffered large terms-of-trade losses. The energy- countercyclical measures. intensive economies of Bolivia, Ecuador, and Venezuela ex- perienced particularly significant losses in export revenue. The Region is expected to grow 4.5 percent in 2010 and In the best-performing countries (Brazil, Colombia, Mexico, 5.1 percent in 2011. The quick recovery reflects the limited and Peru), the impacts of these shocks have been mitigated integration of most low-income economies into the global by an enhanced ability to implement countercyclical mon- economy and the limited impact on their terms of trade, the etary and fiscal policies, more resilient financial sectors, and rapid recovery in global trade and commodity prices, and willingness to use the exchange rate as a shock absorber. For the use of countercyclical fiscal policies. Remittances and of- calendar year 2009, GDP is estimated to have fallen 2.3 per- ficial aid flows have also been less affected by the recession in cent, following an expansion of 4.1 percent in 2008. advanced economies than anticipated. The Global Crisis and Its Impact on Developing Countries | 11 Middle East and North Africa. The developing economies of close links to China, which has led the Regional and global re- this Region were adversely affected by the crisis to varying covery thus far in 2010. However, the earlier strong momen- degrees, largely depending on the composition of their ex- tum in Regional exports and production is waning, and output ports and reliance on remittances and tourism. Growth for gaps are closing rapidly. Coupled with large capital inflows and the more diversified economies dropped by about 2 percent- rising liquidity, this may put pressure on both goods and asset age points in 2009, from a strong 6.5 percent GDP growth price inflation. To reflect these factors, Regional and Chinese in 2008 to 4.7 percent in 2009. The virtual collapse of key growth are projected to slow in the 2011­12 period. export markets (notably the Euro area) induced sharp de- South Asia. GDP growth in the Region slowed markedly in clines in the merchandise exports of countries such as Egypt, 2008--to 4.9 percent from 8.4 percent in 2007. The slowdown Jordan, Morocco, and Tunisia. At the same time, remittances in growth during 2008 reflected increasing weakness in the and tourism revenues--both important sources of foreign Region's two largest economies, India and Pakistan. Although income that support household consumption and job cre- the global economic crisis had a negative impact on South ation for these countries--declined by 5 percent. Despite Asia, the slowdown in Regional GDP growth was the least pro- large, continuing infrastructure development programs, the nounced among all developing Regions. This partly reflects the growth rate of developing oil exporters declined by 3 per- relatively closed nature of the Region's economies. centage points in 2009 (from 4.6 percent in 2008 to 1.6 per- cent in 2009). Overall, the 2009 Regional growth rate was Regional economic activity has shifted into positive growth only 3.2 percent. since mid-2009, led by India, Bangladesh, and, more recent- ly, Pakistan. Fiscal stimulus measures have supported the re- As a consequence, 2010 saw the Region growing out of the cri- bound in output by helping to boost consumer demand. And sis rather quickly. Regional GDP is projected to grow 4.0 per- continued robust remittance inflows (in contrast to declines cent in 2010 and 4.3 percent in 2011. Higher commodity pric- elsewhere) and the recovery in global demand contributed es and external demand are boosting production and exports to the achievement of 7.1 percent Regional growth in 2009. in many economies in the Region. In addition, government GDP is projected to grow by 7.5 percent in 2010. Improved stimulus packages are playing a key role in enhancing the re- investor sentiment, particularly related to strong growth in covery. The sluggish recovery and weak demand for imports India and new IMF stabilization programs (Pakistan and Sri in Europe, and particularly the renewed risks emerging from Lanka), as well as improved political stability in part of the the Greek debt crisis, together with vulnerable financial sec- Region (the end of civil war in Sri Lanka), led to renewed tors and weak property markets in the Region (Kuwait and capital inflows. the United Arab Emirates in particular), are potential vulner- abilities that could have a negative impact on the recovery. Social Impact of the Crisis East Asia and the Pacific. The developing countries in East The global economic crisis has erased some of the gains Asia and the Pacific escaped the worst of the crisis. They ex- in living standards achieved by the developing world dur- perienced the lowest declines in GDP growth among all Re- ing the 10 years prior to the crisis. Bank estimates indicate gions and the earliest and fastest recoveries. GDP growth in the Region was estimated at 7.1 percent in 2009, just over 1 percentage point below the high growth rate of 8.5 percent in 2008. The slowdown in GDP growth mainly reflected weaker investment and private sector demand, which were partially offset by an increase in public expenditures. The rapid nor- malization of trade following the financial dislocation in late 2008 greatly benefited the Region's export-oriented econo- mies. Good internal and external balances and low public debt levels at the start of the crisis allowed many Asian econ- omies to implement strong and timely countercyclical policy responses. Arguably, the lessons from the earlier East Asian crisis in the late 1990s were also influential in the policy de- cisions taken before and during the crisis. The Region is expected to grow by 8.7 percent in 2010 and 7.8 Photo courtesy of Curt Carnemark/World Bank. percent in 2011. East Asia and the Pacific has benefited from 12 | The World Bank Group's Response to the Global Economic Crisis that the crisis left an additional 50 million people in extreme Before and After the Crisis poverty (below $1.25 a day) in 2009 alone, and that the num- From 2000 until the start of the crisis, there was marked ber will rise to 64 million by the end of 2010 (World Bank improvement in the indebtedness and fiscal performance 2010e). of most developing countries (with some major exceptions, A rapid economic recovery would improve the situation mainly in Central and Eastern Europe). Advanced econo- for many of the extremely poor--but would still leave mies, however, did not share in this improvement (table the poverty rate below Millennium Development Goal 2.3). During the crisis period, fiscal deficits increased in all (MDG) targets. A quick rebound would lead to substantial country groups, irrespective of income level, as a result of reductions in the poverty rate, to 15 percent in 2015, which the crisis impact and automatic stabilizers (lower fiscal rev- is still well below the MDG target of 20.4 percent (see table enues and higher social sector expenditures), and, in some 2.2, "quick recovery"). Even under this scenario, however, cases, because of fiscal stimulus programs implemented in the crisis will have a lasting effect on poverty. Had the crisis response to the crisis. But, as noted above, the differences in not interrupted the rapid economic progress made by de- starting conditions explain a large part of the differences in veloping countries through 2007, the poverty rate (at $1.25 the severity of the crisis among countries. At the same time, a day) would have fallen to about 14 percent by 2015 (table the differences in starting conditions are also a major factor 2.2, "pre-crisis trend"). This means that, in the absence of in accounting for the differences in post-crisis vulnerabilities the crisis, an additional 53 million people would have been brought about by increased fiscal deficits. lifted out of extreme poverty. If the economic outlook dete- Indebtedness riorates to the low-growth scenario (table 2.2, "low-growth The global public debt-to-GDP ratio rose from 58 percent recovery"), the poverty rate would only fall to 18.5 percent, in 2007 to 68.9 percent in 2009. It is expected to continue which would mean that an extra 214 million people would to rise and to approach 79 percent in the next five years. be living in absolute poverty by 2015 as a result of the crisis This overall increase shows a very different picture when the and subsequent slow growth. countries are grouped by income level (table 2.3). The main The long-term social impact of the crisis becomes clearer increase in indebtedness (absolute and relative) took place when the global projections are extended 10 years forward. in the advanced economies, where debt increased from 72.9 The recovery trend suggests that by 2020, 826 million people to 90.6 percent of GDP. In the developing countries, in con- (12.8 percent) in developing countries will be living on less trast, the debt-to-GDP ratio increased marginally, from 36.9 than $1.25 a day, with 71 million more people living in abso- percent in 2007 to 38 percent in 2009. This was partly due to lute poverty in 2020 as a result of the crisis. The low-growth a less severe crisis impact (and limited access to financing) in scenario would result in a rise of 227 million living in absolute the developing economies. poverty compared with the post-crisis recovery trend. A striking feature of the changes in indebtedness is that developing countries had lower indebtedness ratios at the Fiscal and Debt Dynamics: end of 2009 than at the end of 2000, in spite of the crisis and the associated increase in fiscal deficits in the past two years. This was the result of major improvements in macro- TABLE 2.2 Poverty in Developing Countries, economic policy and performance by developing countries Alternative Scenarios, 2005­20 during the first years of the decade. In turn, these improve- ments helped to cushion the impact of the global crisis on Global level 2005 2015 2020 developing countries, which could have been much more se- Percentage of the population living on less than $1.25 a day Quick recovery 25.2 15.0 12.8 Pre-crisis trend 25.2 14.1 11.7 TABLE 2.3 General Government Gross Debt by Low-growth recovery 25.2 18.5 16.3 Country Group (percent of GDP) Number of people living on less than $1.25 a day (millions) Group 2000 2005 2007 2009 Quick recovery 1,371 918 826 World 58.3 60.4 58.0 68.9 Pre-crisis trend 1,371 865 755 Advanced economies 66.7 74.7 72.9 90.6 Low-growth recovery 1,371 1,132 1,053 Developing countries 46.2 40.1 36.9 38.0 Source: World Bank 2010e. Source: IMF 2010b,c. The Global Crisis and Its Impact on Developing Countries | 13 vere without these improvements (as the experience of some reached nearly 8 percentage points, compared with just over Europe and Central Asia countries has shown). 5 in developing countries. Moreover, as in the case of indebt- edness, the starting fiscal position of developed countries Advanced economies, however, entered the crisis (as a group) was also worse than that of developing countries: between with a high debt­to-GDP ratio that had remained largely 2000 and 2007, just before the crisis, the fiscal deficit of ad- stable since 2000 (worsening in the first half of the decade and improving slightly thereafter). In this group the fiscal ex- vanced economies had improved only slightly, while the fis- pansion from stimulus packages, coupled with plummeting cal balances of developing countries had improved by about revenues, raised the ratio further--from 73 percent in 2007 3 percentage points. It should be noted, however, that the to 91 percent in 2009. The worsening of world average and average improvement for all developing countries hides big advanced economies' debt ratios is also the sharpest in any differences across regions and among countries, with large single two-year period since 1995. The increase in public improvements in Asia and Latin America, and to some ex- debt in high-income countries may be even higher than not- tent in Africa, and continuing weak performance in Europe ed here when the massive contingent liabilities introduced as and Central Asia. part of the crisis-response packages are included (in export The large fiscal and monetary expansion, especially in high- guarantees, deposit insurance, loan guarantees). income countries, was the correct response to the global eco- Fiscal Deficits nomic crisis. Without the coordinated, multilateral expansion Owing both to increases in expenditure and losses of rev- (which might be short lived because of the issues discussed enue, government balances have worsened sharply in many above), the recession could have turned into a worldwide de- countries in the past two years. The changes are largest in pression. Some large developing countries with good condi- high-income countries, although they are striking in some tions at the outset of the crisis (such as China and Indonesia) developing regions as well. Because of the differences in also responded with stimulus packages, although in some indebtedness and in fiscal position before the crisis, the in- cases (Indonesia) they were not very large. creased fiscal deficits will also have differing effects on fu- In other large developing countries, also with good starting ture debt dynamics and vulnerabilities during the post-crisis positions but more severely affected by the crisis (such as period of individual countries. As a group, however, the Mexico), the "fiscal headroom" was more limited and the high-income countries have generally been left in a worse deterioration in the fiscal balances more closely related to situation by the fiscal deterioration than have the developing the impact of the crisis than to a deliberate stimulus pack- economies. age. Finally, in developing countries that entered the crisis For all countries combined, the general government bal- with greater vulnerabilities, the large increases in the fis- ance is estimated to have increased by nearly 6 percentage cal deficits, mainly through drastic reductions in fiscal rev- points in two years (from minus 1.1 percent of GDP in 2007 enues, were the unintended result of the crisis and they pose to minus 7.2 percent in 2009; see table 2.4). This deteriora- serious risks and increased vulnerabilities for the post-crisis tion is by far the largest since 1995, the first year for which period. comparable data exists, and possibly the largest in decades. Post-Crisis Fiscal and Debt Dynamics It is also a record high compared with the average post-crisis Unlike some of the previous episodes, the 2007­09 economic increase of 2.4 percentage points in the fiscal deficits of indi- crisis called for a fiscal expansion rather than belt tighten- vidual countries or groups of countries involved in 49 crisis ing. Hence the deterioration of fiscal deficits and increases in episodes since 1980. public debt noted here are neither surprising nor undesirable. As in the case of indebtedness, the fiscal deterioration has But they do raise serious issues that need to be addressed in been the most severe in advanced economies, where it the post-crisis period, and they also point to the importance TABLE 2.4 of prudent fiscal and debt management in periods of growth General Government Balance by Country Group and global expansion. The impact of the crisis was smaller-- and the reaction to the crisis more effective--in the many de- Group 2000 2005 2007 2009 veloping countries that had achieved improvements in their World 1.1 1.7 0.6 7.2 fiscal positions during the 10 years prior to the crisis. Coun- Advanced economies 0.2 2.3 1.1 8.8 tries that entered the crisis with limited fiscal space and high Developing countries 3.2 0.8 0.0 4.9 debt suffered more severe crises and had more limited room Source: IMF 2010b,c. to maneuver in their crisis-response packages (IMF 2010a). All of them, however, now need to address the increased debt 14 | The World Bank Group's Response to the Global Economic Crisis and higher deficits as part of the post-crisis management. in export revenues and remittances; serious social effects in the form of rising unemployment and poverty; and the need Experience with difficulties in bringing deficits and debt under control call attention to the need, for 2010 and for urgent action by IFIs to help fill financing gaps (both in beyond, to balance fiscal stimulus with measures for fis- the public and private sectors), assist in the provision of social cal sustainability. Crucial in this context is the quality of safety nets, and offer knowledge services geared toward better government spending and the impact it is likely to have on systems of regulation and governance. As in the past, govern- sustaining economic growth. Examining the types of fiscal ment deficits and debt have also increased. expansion and their impact on real output growth in differ- Another key similarity is the importance of domestic poli- ent countries, the cost of borrowing, and private sector re- cies and macroeconomic stance when an external shock hits sponse are important areas for the governments to handle, developing countries. As noted earlier, countries with better and for the Bank Group to support and expand on in future fiscal performance before the crisis, and particularly with low- work. er indebtedness, were able to cushion the adverse impacts of the crisis (including its social impact) through stimulus pack- Comparison with Previous Crises ages that temporarily increased the size of their fiscal deficits The 2008­09 global economic crisis both differed from, without posing serious vulnerabilities for the post-crisis pe- and resembled, earlier crises. Unlike past crises in emerging riod. Also, those with greater trade and investment openness economies, this event had its roots in the financial systems of appear to be recovering faster (IMF 2010b). As the recovery developed countries, had a global reach, and overlapped with continues, attention to fiscal and debt sustainability, alongside the food and fuel price crises. At the same time, the impact support for trade and wellregulated private sector investment, of the crisis on low- and middle-income countries has many will be crucial for all developing (and developed) countries. similarities with past episodes: a rapid decline in capital in- flows and economic activity in emerging economies; declines The Global Crisis and Its Impact on Developing Countries | 15 Chapter 3 Once the global economic crisis started, it un- folded and spread very quickly. But acknowl- edgment of the crisis by the development community took some time. International financial markets shut down almost overnight following the collapse of Lehman Brothers in mid-September 2008, but it took a while for the global community--including the World Bank Group--to realize the full implications of what was happening. Photo courtesy of Shehzad Noorani/World Bank. The World Bank Group's Response Once the global economic crisis started, it unfolded and spread very quickly. But ac- knowledgment of the crisis by the development community took some time. Interna- tional financial markets shut down almost overnight following the collapse of Lehman Brothers in mid-September 2008, but it took a while for the global community--includ- ing the World Bank Group--to realize the full implications of what was happening. The Bank Group responded in waves. Its initial response the Bank Group were widely divergent coming into the cri- focused narrowly on increasing Bank lending, especially sis. Given low demand from middle-income borrowers for from middle-income borrowers. As the scale of the demand IBRD resources in the pre-crisis period, the IBRD was able became apparent, the Bank took measures to ration available to increase its annual lending nearly threefold during fiscal IBRD capital and get Board approval for an IDA Fast-Track 2009­10. IDA was able to increase lending by a more modest Facility, while IFC began to develop global crisis initiatives 25 percent within the constraints of its funding availability. to mobilize funds and leverage its role and impact (Develop- IFC's starting situation was very different. It faced equity ment Committee 2008a). IFC management had already rec- write-downs and increasing nonperforming loans from ognized the potential for countercyclical investments in the investments made during its pre-crisis expansion and had event of a downturn, especially in MICs, alongside prudent management of the existing investment portfolio (see IFC committed additional transfers to IDA. IFC conservatively 2007, 2008). estimated that it could invest around 5 percent more per year in fiscal 2009­11 than in 2008 (this is conservative, given rat- Over time, more formal statements set out the linkages ing agency assessments of IFC's capital adequacy and experi- across programs, including those between Bank and IFC ence showing the financial and development benefit of IFC programs. A three-year strategy statement issued in March investing during a crisis).1 2009 highlighted two main strands of the Bank Group's op- erational response. In the first strand, the Bank Group was Differences in approaches to pricing were also a factor in the seen to be stepping up its financial assistance to help its differing responses of IBRD and IFC, because these differ- member countries mitigate the impact of the crisis, estab- ences affected demand by middle-income clients for Bank lishing magnitudes of $100 billion for IBRD, $42 billion for Group financing. IFC's loan pricing is built on the premise IDA, and $36 billion for IFC (alongside funds mobilization that IFC should complement and not displace private capital. of around $24 billion). In the second strand, it defined a Its pricing factors in project and country risk premiums to three-pillar response structure designed to protect the most the extent that benchmarks are available.2 As a result, over the vulnerable against the fallout of the crisis. This was to be crisis period loan prices tended to rise most in countries hit done through the existing Global Food Response Program hardest by the crisis. The IBRD, in contrast, does not discrim- and a new Rapid Social Response Program by maintaining inate among borrowers. The IBRD had historically low loan long-term infrastructure investment programs through the pricing when the crisis hit, having reduced the cost of new existing Infrastructure Recovery and Assets Platform and loans by an average 25 basis points over the LIBOR (London by sustaining the potential for private sector­led economic interbank offered rate) benchmark in September 2007 (re- growth and employment creation through IFC. These pillars turning the all-in cost of new borrowing back to 1998 levels) were positioned in the broader context of an over-arching (World Bank 2007). This was followed in February 2008 by an focus on macroeconomic stability at the core of the crisis increase in maximum tenors--to 30 years--for all new loans response. and guarantees. Loan pricing was adjusted upward again only in August 2009, this time by 20 basis points.3 Capital headroom had a significant influence on the Bank Group response, and accounted for differences in the level The Bank Group response was countercyclical overall, but and approach to financing across the IBRD, IDA, IFC, on balance the responses of IFC and MIGA were not coun- and MIGA. The capital positions of the different parts of tercyclical. Table 3.1 shows the aggregate Bank Group com- 18 | The World Bank Group's Response to the Global Economic Crisis TABLE 3.1 IFC and MIGA responses that were not countercyclical over- World Bank Group Commitments, Fiscal 2008­10 (US$ billions all.4 Figure 3.1 provides a longer-term perspective for the IBRD and IFC, highlighting the flat demand for IBRD financing in World Bank the pre-crisis period, which generated financial headroom for Group 2008 2009 2010 a more substantial response, and growth in IFC's business that IBRD 13.5 32.9 44.2 limited capital headroom when the crisis struck. IDA 11.2 14.0 14.5 The Bank Group has disbursed more than any other IFI-- IFC 11.4a 10.5 a 12.6 a including the IMF--in this crisis. Table 3.2 compares aggre- MIGA 2.1 1.4 1.5 gate Bank Group commitments and disbursements during fis- Total 38.2 58.8 72.2 cal 2009­10 with those of the IMF and other IFIs. It shows that Source: World Bank data. a. Own account only. Excludes $4.8 billion in fiscal 2008, $4.5 billion Bank Group commitments were below those of the IMF, but in 2009, and $5.4 billion in 2010 mobilized through syndications and that Bank Group disbursements exceeded those of the IMF. structured finance. The relatively lower IMF disbursements compared with com- mitments reflect, in part, the contingent nature of much of mitments for the evaluation period of fiscal 2009 and 2010, the IMF's support, as well as the size of the outstanding Bank and for 2008 for comparison. It reveals sharp differences in re- Group portfolio at the start of the crisis. The flows of other sponse across Bank Group institutions: dramatically increased IFIs were proportionately less than those of the Bank Group, IBRD lending, moderately higher financing through IDA, and but with broadly similar relationships between commitments gure 2.1 FIGURE 3.1 IBRD/IFC Financing to Developing Countries, Fiscal Years 1990­2010 (US$ million) Source: World Bank data. The World Bank Group's Response | 19 ments broke Bank records, and fiscal 2010 broke the 2009 TABLE 3.2 IFI Financial Flows, Fiscal Years record.5 These developments were driven largely by IBRD 2009­10 (US$ billion) support to middle-income borrowers. IDA support to LICs Gross Gross was considerably smaller than the IBRD response, but in ab- IFI commitments disbursements solute terms it was also strong. World Bank Group (w/o MIGA) 128.7 80.6 New commitments in fiscal 2009­10 were 114 percent IMF 219.0 67.0 above those of fiscal 2007­08. IBRD commitments rose by Other IFIs 81.7a 56.4 a 193 percent between the two periods, and IDA commitments Sources: World Bank Group, IMF, ADB, EBRD, IADB, and AfDB data. by 24 percent. This pattern--of a large IBRD response and a a. Other IFI data through end-June 2010; includes Asian Development Bank smaller IDA response--is similar to the Bank's response to (ADB), European Bank for Reconstruction and Development (EBRD), Inter- American Development Bank (IADB), and African Development Bank (AfDB). the East Asian crisis (fiscal 1998­99). The increase in Bank disbursements--a more relevant measure of the Bank's crisis response--lagged behind and disbursements. Bilateral development assistance also in- commitments. Disbursements in fiscal 2009­10 were 73 creased, by nearly $20 billion between 2007 and 2009. percent above their 2007­08 level. They were at record levels in fiscal 2009 and topped those levels in fiscal 2010, World Bank Response driven, as with commitments, by IBRD transactions with MICs. Of the $68.1 billion of Bank disbursements for fiscal The analysis of the World Bank response focuses on evi- 2009­10, about 57 percent ($38.8 billion) were on "new" dence related to two main evaluation questions: What did commitments (approved in fiscal 2009­10), and 43 percent the Bank do? And how did the Bank do it? To help answer ($29.3 billion) on "old" commitments (approved before fis- these questions, this section of the chapter first examines cal 2009­10). trends in lending, special initiatives, and analytic and advi- sory activities (AAA). It then examines the evidence on the There were also differences between IBRD and IDA. Sixty- Bank's internal crisis readiness and the external coordina- six percent of IBRD disbursements were from new commit- tion of its crisis-response activities. ments, while only 37 percent of IDA disbursements were from new commitments. For the old commitments (mostly Financial Response investment loans), there is no evidence of faster disburse- Lending Volumes ments than in previous years or of attempts to speed them In nominal terms, fiscal 2009 commitments and disburse- up. The large majority of the disbursements from new com- gure 2.1 FIGURE 3.2 World Bank Commitments and Disbursements: The Long View (US$ million) Source: World Bank data. 20 | The World Bank Group's Response to the Global Economic Crisis mitments are from development policy operations (DPOs), ing year-to-year pattern in South Asia reflects movements as discussed later in this chapter. 6 of both the IBRD--with developments in India--and IDA-- with changes in India and Pakistan. For Sub-Saharan Africa, Regional and Country Focus East Asia and the Pacific, and South Asia, Regional shares Reflecting developments at the country level, the Regional of disbursements have moved less than commitments. Dis- shares of Bank lending shifted significantly during the fis- bursements have been stabilized mainly by the Bank's large, cal 2009­10 crisis period (table 3.3). In commitments, the slow-disbursing portfolio of investment lending, approved in shares of the Latin America and Caribbean and Europe and previous years. However, the increased commitment shares Central Asia Regions--where the crisis hit the hardest-- of Latin America and the Caribbean and Europe and Central rose during fiscal 2009­10 compared with previous years. Asia carried over to disbursements, reflecting the heavy use The commitment share of the Sub-Saharan Africa and East of quick-disbursing instruments in the Bank's crisis response Asia and Pacific Regions declined, the share of the Middle in the two Regions. East and North Africa remained broadly unchanged, and the A changing Regional distribution of IBRD lending had share of South Asia declined in fiscal 2009, before bouncing also been a pattern in the East Asian crisis, when affected back in 2010. MICs turned to the Bank as financial markets closed to The increase in the shares of Latin America and the Ca- them. But recent developments differed from that pattern ribbean and Europe and Central Asia is an IBRD story, in two respects. First, this time IBRD investment lending largely of DPOs, but also of quick-disbursing investment has also been strong in Europe and Central Asia and Latin loans. The decline in the Sub-Saharan Africa share reflects America and the Caribbean--this did not happen among the sharp increase in IBRD lending relative to IDA, rather middle-income borrowers in fiscal 1998­99. Second, East than any diminution of lending to the Region. Sub-Saharan Asia and Pacific countries (except Indonesia and Vietnam) Africa's fiscal 2010 bounce, the product of the April approval were much smaller users of DPOs this time, reflecting their of a large ($3.75 billion) IBRD loan to South Africa, is shown relatively lower exposure to this crisis.7 The jump in South in table 3.3. For East Asia and the Pacific, the fall reflects Asia's fiscal 2010 IBRD commitment share reflects a fully declining shares of both IBRD and IDA lending. The chang- disbursed $2.0 billion DPO to India for financial sector re- form and $3.3 billion in investment lending commitments, although little of this commitment has disbursed (which ex- TABLE 3.3 Regional Shares of Bank Lending plains the failure of South Asia's disbursements to match the Commitments and Disbursements increase in its share of commitments). (percent) For the Bank as a whole, the increase in lending went to all Fiscal year country groups, but was much greater for countries that Region 2007 2008 2009 2010 experienced large adverse impacts from the crisis, with Commitments the differences especially pronounced for disbursements. Sub-Saharan Africa 23 23 17 19 The evaluation divided all borrowing countries into three East Asia & Pacific 16 18 17 13 groups according to the impact of the crisis. Those with a Europe & Central Asia 15 17 20 18 decline in GDP growth of more than 5 percent between the Latin America & Caribbean 19 19 30 24 pre-crisis (2006­07) and post-crisis periods (fiscal 2009­10) were classified as "most-affected" countries. Bank disburse- Middle East & North Africa 4 6 4 6 ments to this group, which includes 29 countries, increased South Asia 23 17 12 19 by 133 percent between the pre- and post-crisis periods. Disbursements Bank disbursements to the 51 countries classified as "least- Sub-Saharan Africa 20 24 16 15 affected" (those where GDP increased or fell by less than 2 East Asia & Pacific 17 18 17 14 percent) increased by only 30 percent between the two pe- Europe & Central Asia 15 16 19 20 riods. For the "moderately affected" countries, the increase was 82 percent. Latin America & Caribbean 19 17 29 29 Middle East & North Africa 9 6 5 6 The results outlined in table 3.3 are very different when South Asia 21 18 14 16 IDA and IBRD lending are considered separately. For the Source: World Bank data. IBRD, the distribution is similar to that of the Bank as a whole. The increase in disbursements was 146 percent for The World Bank Group's Response | 21 the most-affected countries, and a much smaller 77 per- Jamaica, Mauritius, Serbia, Tunisia, and Ukraine. In addi- cent for the least-affected countries. The average increase tion, lending operations in Poland, Turkey, and Vietnam in IBRD disbursements between the pre- and post-crisis provided support for labor market improvements. periods was 125 percent. For IDA, however, the increase · Social protection accounted for 13.3 percent of the in- in disbursements differed little across the three groups of crease ($7.5 billion) in commitments, including DPO countries. Disbursements to the most-affected countries and investment lending support for targeted social pro- increased by 14 percent, to the moderately affected coun- tection programs in countries such as Bosnia and Her- tries by 20 percent, and to the least-affected countries by zegovina, Bulgaria, Colombia, Ethiopia, Latvia, Mexico, 15 percent. The average increase in IDA disbursements Nepal, Pakistan, Panama, and the Philippines. However, between the pre- and post-crisis periods was 17 percent. support for social protection was concentrated in a few The evaluation Approach Paper and subsequent IEG re- large loans, and almost 60 percent of the support was di- porting to CODE highlighted developments in 13 MICs, rected to three IBRD countries (Colombia, Mexico, and which together accounted for about 70 percent of IBRD Poland) and one IDA country (Ethiopia). In addition, a lending during the pre-crisis period (IEG 2009a,c). Dur- number of DPOs classified as economic policy includ- ing the fiscal 2009­10 crisis period, their combined share of ed social protection components, including DPOs in IBRD lending rose to 75 percent. Together, the 13 countries accounted for 77 percent of the increase in IBRD commit- ments over the period, with 2 of the 13 countries--Mexico and Indonesia--accounting for 29 percentage points of the increase. These countries differed fundamentally in the de- gree to which they were affected by the crisis. Mexico was among the most crisis-affected, and Indonesia among the least.8 However, Indonesia sought to increase its engagement with the Bank as part of an explicit crisis-prevention strat- egy (see chapter 4). Three of the 13 countries--Brazil, In- dia, and Poland, which were among the moderately affected countries--accounted for another 28 percent of the overall increase (see appendix tables A4 and A5). Sectoral and Thematic Focus Five sectors--economic policy, social protection, the finan- cial sector, infrastructure, and environment--accounted for almost all of the $56.2 billion increase in lending commit- ments and $28.8 billion in disbursements in fiscal 2009­10 compared with fiscal 2007­08. As discussed below, infrastruc- ture accounted for the largest increase in lending commitments, reflecting a very strong outturn in the fourth quarter of fiscal 2010, and economic policy for the largest increase in disburse- ments. These relativities are in line with the differential time- frames and instruments--with infrastructure finance largely focused on the medium/long term and delivered through in- vestment lending, while economic policy support was more focused on the short term and delivered through DPOs. · Economic policy accounted for 23 percent of the increase ($13.1 billion) in Bank commitments and 28 percent of the increase ($8.1 billion) in disbursements, driven by the in- crease in DPOs. These operations supported policy reforms aimed at improving fiscal sustainability, the quality of pub- lic expenditures, and external competitiveness in countries Photo courtesy of Ray Witlin/World Bank. large and small, such as Brazil, Guatemala, Indonesia, Iraq, 22 | The World Bank Group's Response to the Global Economic Crisis Armenia, Croatia, El Salvador, Ghana, Indonesia, Iraq, IBRD DPO commitments in fiscal 2009­10 totaled $36.1 bil- Jordan, Macedonia, Poland, Romania, Serbia, Turkey, lion, representing a fourfold increase over fiscal 2007­08. and Vietnam. The fiscal 2009­10 total included $4.9 billion that used the deferred drawdown option (DDO), of which $1.1 billion has · The financial sector accounted for 16 percent of the in- been disbursed. Of the $31.2 billion in regular DPOs, $17.7 crease ($8.8 billion) in commitments. Most of this lend- billion has been disbursed. These developments reflect large ing was approved in fiscal 2010 and supported financial IBRD DPO commitments to Brazil, Colombia, Hungary, In- sector development or reform in Hungary, India, Latvia, dia, Indonesia, Mexico, Peru, Poland, Turkey, and Ukraine, in Mexico, Nigeria, and Turkey. These operations were both several cases including use of the DDO, which was also used DPOs and credit lines, and the evaluation's preliminary in smaller operations for Bulgaria, Costa Rica, and Mauritius. assessment raised several questions about these opera- Through the end of fiscal 2010, only one operation--the Lat- tions for further review in Phase II of the evaluation. via Safety Net and Social Sector Program--had been approved · Infrastructure accounted for 29 percent of the over- by the Board as a Special Development Policy Loan.10 all increase in Bank commitments ($16.4 billion), with In sharp contrast, IDA DPO commitments totaled $5.2 bil- much of it coming in the fourth quarter of fiscal 2010. lion over the period, a decrease of 2.4 percent over fiscal The increase was due primarily to increased investment 2007­08. Over half of the total was in credits to four coun- lending commitments of $4.0 billion for transport and tries--Nigeria, Pakistan, Tanzania, and Vietnam--with DPOs $11.1 billion for energy, driven by large loans to Egypt, also to a number of other countries in Sub-Saharan Africa India, Kazakhstan, Mexico, South Africa, and Turkey. In- (Burkina Faso, Côte d'Ivoire, Ghana, Mozambique, and Rwan- frastructure accounted for a much smaller share (about da, among them) and South Asia (Afghanistan, Bangladesh, 18 percent) of the increase in disbursements. Bhutan, and the Maldives). Ten out of 14 operations approved · Environment accounted for 6 percent of the increase in to date under the IDA Fast-Track Initiative, launched in late commitments ($3.4 billion) and included green programs 2008, have been DPOs (World Bank 2008c). in Brazil, Colombia, Mexico, and Peru, among others. IBRD investment lending commitments in fiscal 2009­10 Box 3.1 provides details on the social protection and in- amounted to $41 billion, an increase of 119 percent over frastructure sectors, because they are also covered by fiscal 2007­08. Among these, there have been some very Bank special crisis-response initiatives. It also describes large investment operations that have disbursed very little, the Global Food Response Program (GFRP), for which the such as the Kazakhstan $2,125 million Southwest Road lead sector, Agriculture and Rural Development, lost ground Loan. That loan, which had long been in the lending pro- in relative terms during the crisis period, with commitments gram as a $100 million operation, increased 21-fold just rising by $1.7 billion in fiscal 2009­10 compared with 2007­ before negotiations. More recently, the $3.75 billion South 08, and disbursements flat. African Eskom Investment Support Loan has disbursed under $10 million, though it became effective quickly after Lending Instruments and Modalities approval in April 2010. During fiscal 2009­10, investment lending accounted for IDA investment lending commitments in fiscal 2009­10 61 percent of commitments and 53 percent of disburse- totaled $23.4 billion, an increase of 31 percent over fiscal ments, while DPOs represented 39 percent and 47 percent, 2007­08. About half of this amount ($12.4 billion) went to respectively. However, the shares are very different for IBRD six countries--Bangladesh, India, Nigeria, Ethiopia, Paki- and IDA (box 3.2). For the IBRD, DPOs accounted for 47 stan, and Vietnam. IDA investment lending disbursements percent of commitments and 56 percent of disbursements, totaled $15.5 billion, of which $3 billion was for operations while for IDA, DPO commitments remained below 25 per- approved during fiscal 2009­10, with $12.5 billion for port- cent and disbursements below 30 percent. Similar patterns, folio operations approved in earlier years. with a strong IBRD development policy lending response and a limited IDA response--characterized the Bank's re- Analytical Response sponse to the East Asian crisis.9 Corporate Strategy and Communications DPO commitments totaled $41.3 billion during fiscal Corporate communications have said little about the Bank's 2009­10, and disbursements $31.7 billion, of which $22.9 analytic response. The Bank's Web site states that analytic billion was for new commitments approved during the work was central to its crisis response, yet it pays far greater period. attention to the financial response (see World Bank 2010b). The World Bank Group's Response | 23 BOX 3.1 SPECIAL THEMATIC CRISIS RESPONSE INITIATIVES The Bank's crisis-response strategy included thematic initiatives to reinforce institutional priorities of protecting the vulnerable, preserving infrastructure, and rapidly responding to country needs. The initiatives include the Global Food Crisis Response Program (GFRP) and the Rapid Social Response Program (RSR), which function under the Bank's Vulnerability Financing Facility, and the Infrastructure Recovery and Assets Platform (INFRA). Vulnerability Financing Facilitya The Global Food Crisis Response Program (GFRP) was launched in May 2008, in cooperation with United Nations and other agencies, to help countries deal with the global food crisis in the short term and to achieve sustainable food security over the longer term. It developed the fast-track approach that was subsequently adopted by the IDA Fast-Track Facility and included three externally financed trust funds, as well as a single donor trust fund from the IBRD surplus, in addition to regular IDA and IBRD financing. Through the end of fiscal 2010, the GFRP covered 55 operations, committing $1,238 million and disbursing $920 million, for an overall disbursement rate of 74 percent. The relatively high disbursement rate reflects the greater proportion of DPOs, emer- gency operations, and quick-disbursing trust funds in the GFRP than in IDA and IBRD operations more generally. For example, in agriculture and rural development, the GFRP covered 24 operations in IDA borrowers, with commitments of $631 million in fiscal 2008­10 and disbursements of $407 million, for a disbursement rate of 65 percent, compared with 27 percent for IDA operations more broadly. If the $250 million Ethiopia emergency food crisis credit, which is fully disbursed, is excluded from commitments and disbursements, the GFPR disbursement rate for agriculture and rural development declines to 41 percent, and if the trust fund components are also excluded, the rate declines further--to 31 percent. The GFRP also provided for diagnostic studies and involved periodic monitoring and reporting on the situation in affected countries. The Rapid Social Response Program, launched in April 2009, focused on social safety nets, labor markets, and access to basic social services, especially in low-income countries.b It combined donor trust fund support for diagnostics and country capacity building with support for rapid social response themes through IBRD and IDA loans, credits, and grants. The latest RSR progress report sets out $4 billion in Bank commitments in fiscal 2009 and in 2010, compared with less than $1 billion in 2008. While the program may have helped to highlight the importance of social protection in the response, the numbers point strongly to a demand-driven response to middle-income IBRD borrowers such as Colombia, Mexico, and the Philippines. For IDA, the larger spike in social response commitments came in fiscal 2009 (before the launch of the RSR). Infrastructure Recovery and Assets Program (INFRA) c INFRA grew out of the Bank's Infrastructure Action Plan and, as of April 2009, had become one of the three pillars of the Bank Group response. It covers diagnostics, partnerships, and lending in four subsectors--energy, global communications, transport, and water--that are typically supported by investment lending. Including Board approvals of $13.4 billion in the fourth quarter of fiscal 2010, and driven by large IBRD loans in energy and transport, commitments for infrastructure rose by 77 percent during fiscal 2009­10 compared with fiscal 2007­08, mostly in the form of investment lending; disbursements increased by 40 percent. a. The Vulnerability Financing Facility was to have included a third pillar, the proposed Energy for the Poor Initiative (EFPI). Originally conceived in June 2008, when oil prices were double current levels, as a way of providing protection to most-affected groups, the EFPI had not been activated by the end of the third quarter of fiscal 2010. b. See World Bank 2009b c. See www.worldbank.org/infra. Both the April 2009 and October 2009 Reports to the Devel- Development Network (HDN), the Financial and Private opment Committee on the Bank's activities and priorities used Sector Development Department (FPD), or the other Social the same text to describe the Bank's analytic response,11 and Development Network (SDN) sectors, such as agriculture and it has seldom been mentioned in key communications. For rural development and the environment.12 example, in the March 2009 document (World Bank 2009f) DEC and Network Anchors setting out the Bank's crisis-response strategy, almost all refer- ences to Bank Group advisory services were to IFC activities; The evaluation found different approaches to the analytic the only exception was a passing reference to Bank analytic response across central units in the Development Eco- work on infrastructure--with nothing on the work of Poverty nomics Department (DEC) and in the network anchors. Reduction and Economic Management (PREM), the Human DEC was positioned to respond to the crisis in important 24 | The World Bank Group's Response to the Global Economic Crisis BOX 3.2 VELOCITY OF DISBURSEMENTS: COMPARISON OF DPOS AND INVESTMENT LENDING To assess how well the Bank's use of instruments contributed to global stimulus during the evaluation period, the evaluation team examined disbursements of "new" versus "old" loans. The first two columns of the table below show commitments and disbursements during fiscal 2009­10. The third and fourth columns decompose disbursements into two categories-- disbursements from old loans and credits, approved before fiscal 2009, and disbursements of new loans and credits, approved during fiscal 2009­10. It shows that of the total $68.1 billion disbursed in fiscal 2009­10, $29.3 billion (43 percent) was from commitments approved in the years before fiscal 2009, and $38.8 billion (57 percent) was from commitments approved during the evaluation period. It also shows that these proportions varied between DPOs and investment lending. For DPOs, 91 percent ($29 billion) were from commitments approved during the evaluation period. For investment operations, 27 percent ($9.8 billion) were approved during the evaluation period; 73 percent of investment lending disbursements was from portfolio loans and credits approved prior to the evaluation and the onset of the crisis. Disbursements: DPOs and Investment Lending (US$ billions) Disbursements Disbursements of old, pre-fiscal of new, Total commitments Total disbursements 2009­10, fiscal 2009­10, fiscal 2009­10 fiscal 2009­10 commitments commitments Total 105.6 68.1 29.3 38.8 DPO 41.3 31.7 2.7 29.0 Investment lending 64.3 36.4 26.6 9.8 IBRD total 77.1 47.4 16.3 31.2 IBRD DPO 36.1 26.6 2.2 24.4 IBRD investment lending 41.0 20.9 14.1 6.8 IDA total 28.5 20.6 13.0 7.6 IDA DPO 5.2 5.1 0.5 4.6 IDA investment lending 23.4 15.5 12.5 3.0 The charts below provide another way of looking at the same issue. They show the comparative shares of DPOs and investment lending in disbursements and commitments of operations approved in fiscal 2009­10. Though DPOs account for a large majority of disbursements (75 percent) of loans and credits approved in fiscal 2009­10, they represent a minority (39 percent) of commitments. Indeed, the larger point here is the comparative disbursement rates for new commitments approved during the evaluation period-- and that the Bank could have gotten more leverage for its capital by doing more DPOs or other quick-disbursing investment operations. For IBRD DPOs, for example, 68 percent of commitments approved during fiscal 2009­10 disbursed during that same period. For investment lending, the comparable disbursement rate was 17 percent. In other words, to get $100 million of additional disbursements in a 24-month period, the Board would need to approve DPOs (or other quick-disbursing operations) totaling $147 million, compared with slow-disbursing investment loans totaling $588 million, or four times as much. DPO Shares in Disbursements and Commitments, Operations Approved in Fiscal 2009­10 Source: IEG calculations. The World Bank Group's Response | 25 ways, drawing on the Research Department's ongoing work tinued maintenance of infrastructure assets and the preserva- program. Two early DEC responses to the crisis were partic- tion of the pipeline of infrastructure projects throughout the ularly influential--a report on the lessons from World Bank crisis." A broadly similar perspective is reflected in the SDN's research on financial crises and another that estimated the December 2009 progress report discussing INFRA's "advoca- implications of the crisis for infant mortality.13 cy for countercyclical spending on infrastructure as an effec- Subsequently, DEC produced a number of relevant data tive tool to provide the foundation for rapid recovery and job and other products as well, several in partnership with net- creation and to develop a robust economic platform for long work anchors and/or external partners, including monthly term growth" (World Bank 2009e). country-at-a-glance tables on recent economic and financial Regional and Country Programs indicators that contain timely crisis-relevant data on MICs. The Bank's analytic work at the country level was an impor- Further, since 2009, the Bank's flagship publications--Global tant part of the crisis response. Country programs with solid Economic Prospects, Global Development Finance, and Global portfolios of AAA had the necessary foundation in knowledge Monitoring Report--have all focused on the crisis, providing and the relationships with the authorities to expand lending important analysis of and information about aspects of the when the need arose. But equally important, such programs crisis for Bank clients, shareholders, partners, staff, and other were well-placed to inform high-payoff exchanges with the stakeholders. authorities--often through policy notes and presentations-- PREM also issued timely crisis-related papers, some in col- even when lending was unlikely to be forthcoming. Of course, laboration with DEC and HDN. Noteworthy contributions a crisis is not the time to launch new, in-depth analysis, which include reports on the crisis and trade; potential impacts risks being completed only after the crisis is over. Crises thus of the economic downturn on poverty, labor markets, and put a premium on having a good portfolio of country- and employment (in collaboration with HDN); gender implica- sector-based analysis and knowledge to draw from quickly in tions of the crisis; protecting core fiscal spending for growth putting together cogent, practical, and timely policy advice and poverty reduction; design of policies to assist the most and options for the authorities. (See box 3.3 for an analysis of affected; vulnerable countries and populations; and, in col- where there may be gaps.) laboration with DEC and HDN, impacts on the MDGs. The PREM anchor also provided timely insights and analysis for Links between AAA and Lending Regional staff on early crisis impacts and policy responses, in The connections between AAA and lending quality were the context of the PREM Financial Crisis Collaboration Web highlighted in the 11 country case studies prepared for site, which went online in December 2008. the evaluation. Of particular importance is that AAA was In the other sectors, FPD recognized the need for such ap- found to be a decisive determinant of the quality of DPOs proaches later in the crisis, while the SDN was extremely and of the related policy dialogue on the crisis response. proactive, but there was not always sufficient clarity about This reinforces a finding of the recent IEG review of coun- the Bank's role. FPD created a special Web page on the crisis try economic and sector work (ESW) (see IEG 2008b). Re- and issued several papers covering crisis-related topics in the sources for AAA grew by 15 percent in fiscal 2008, then at financial sector. But this effort began relatively late in the life- an annual rate of 5 percent in fiscal 2009 and 2010. Only cycle of the crisis. The first financial sector paper--the brief one country team (Ukraine) of the 10 interviewed for the "Dealing with the Crisis: Taking Stock of the Global Finan- evaluation expressed concern about AAA resources, even cial Crisis" (Stephanou 2009) was issued only in May/June in the face of lending-related budgetary pressures. In some 2009. (Two earlier FPD Policy Briefs, though of good quality, cases (Indonesia and Vietnam), the country teams pointed contained little financial sector specificity--one was a speech to the availability of trust funds for analytic work, and in on the impact of the crisis on emerging economies and the one case (Mexico) to the availability of fee-based AAA ser- other was a Working Paper on taxation in Bulgaria.14 Also, vices and to growing budgetary resources related to the in- Financial Sector Assessment Programs were `current'--that creased lending program. is, carried out between fiscal 2006 and the first quarter of fis- About two-thirds of the case study DPOs reviewed were cal 2009--for only around one-third of client countries. judged to have built on analytic work. Examples of AAA Meanwhile, SDN invested heavily in the INFRA platform products especially welcomed by government included a (see box 3.1), focusing on country-based infrastructure di- country economic memorandum and a demand-driven agnostics. However, this work was geared to supporting what aid-for-trade study in Mauritius, which contributed to the some SDN staff saw as "the Bank's role in advocating for con- government policies and were reflected in the DPO design. 26 | The World Bank Group's Response to the Global Economic Crisis BOX 3.3 PORTFOLIO OF AAA TO INFORM LENDING Once a crisis strikes, it is too late to invest in basic research to inform the response. This understanding prompts a critical question: how well invested was the Bank at the start of the crisis? Whether the Bank's economic and sector work (ESW) was adequate for a high-quality crisis response is a complicated topic, and one that goes well beyond the scope of the current evaluation. But two simple comparisons are helpful in forming views on this question. First, looking across Regions, and mindful of important caveats, the figure below presents comparative data on the Bank's ESW in the fiscal 2007­10 period and lending in fiscal 2009­10. Given the jump in lending to Latin America and the Caribbean, it suggests that ESW for this Region has been underfunded compared with fiscal 2009 and 2010 lending. For Sub-Saharan Africa, ESW is more in line with numbers of projects than commitments, given their small size. Second, the figure shows the results of a similar comparative exercise, but filtered by sector rather than by Region. It suggests that infrastructure (and, to a lesser extent, social development) has been shortchanged on ESW, while the financial sector may have been funded more than other sectors. However, both the infrastructure and social development sectors benefit from large trust funds, which complicate the interpretation of the ESW data and need to be taken into account in the further analysis in the next phase of the evaluation. The World Bank Group's Response | 27 The DPO in Jordan similarly built on a solid portfolio of the provisions for special private sector support as part of the ESW, including an earlier public expenditure review, in- government's stimulus package. vestment climate assessment, Financial Sector Assessment Several Regional chief economists' and sector directors' Program Update, and insolvency and creditor rights Report offices have been proactive on crisis-related topics in the on the Observance of Standards and Codes. In Mexico, ma- context of presentations or sponsored research. For ex- jor environmental studies focused on carbon emissions ample, the chief economist's office in Latin America and the across several sectors of the economy, as well as the policy Caribbean has made a number of crisis-related presentations implications, residential energy prices, and implicit subsi- to audiences within countries in the Region and elsewhere, dies. The review also found that Europe and Central Asia's with an emphasis on the links between macroeconomic and extensive Regional work on pensions provided a platform financial sector issues. The chief economist's office of the for DPO components in Hungary, Poland, and Ukraine, Middle East and North Africa Region also made presenta- among others. tions--in this case, focused on possible transmissions to the Investment lending can also benefit from AAA when rel- real economy in the Arab world. The PREM Sector director's evant sector work is available. Quick-disbursing investment office sponsored an important safety net conference in Egypt projects in social protection in Colombia and Mexico built on for countries in the Region. The Europe and Central Asia previous Bank work on targeting and conditional cash trans- chief economist's office sponsored important research on fers, in which recipient families had to show a record of school the crisis and its implications for households in the Region attendance and health visits of their children to qualify for the (World Bank 2010a). More broadly, Europe and Central Asia transfers. The Mexico investment lending program also drew staff invested heavily in monitoring the impact of the crisis as on a large program of fee-based analytic services to underpin it unfolded, using a variety of analytic tools and data sources quick-disbursing investment loans of $1 billion in the housing and in assessing the adequacy of social assistance programs sector and $1.5 billion for social protection.15 as an input to the policy dialogue with the authorities and The evaluation found examples where the AAA and relat- partners. ed diagnostic work--especially in respect to the Financial Internal Readiness Sector Assessment Program (FSAP)--underpinning op- Had the Bank anticipated the crisis, it would have had erations appeared insufficient, including work in countries more time to prepare for it, but, as in the case of the other with financial sector DPOs. These operations went forward IFIs, it did not. This leads to four questions: Was the Bank without the detailed articulation of measures--and credible somehow remiss in not anticipating the crisis? How well results frameworks--that are critical for success. In those cas- did the Bank do on early warning systems--in detecting the es, the DPO program objectives were vague and aspirational early signs of crisis and sounding the alarm internally and rather than specific and carefully articulated. On the whole, externally? How well-prepared was the Bank to handle what the evidence points to solid AAA and Financial Sector As- the crisis eventually threw at it on the operational side? How sessment Program work as the critical factors in positioning prepared was the Bank to handle the challenges on the fi- the Bank to respond quickly and substantively to countries' nancial side? emerging needs. Where that foundation was missing, the quality of the Bank's crisis response suffered. Indeed, a clear Bank forecasts of the crisis were broadly in line with main- lesson of the evaluation is that good analytical work is an im- stream views. Figure 3.3 shows the evolution of the Bank's portant prerequisite to rapid and effective crisis response in official and publicly disclosed forecast of the growth of glob- general, and to well-constructed DPOs in particular. al GDP for 2009, the forecasts of the IMF and the Economist Intelligence Unit, and the industry "consensus forecast" for Policy Notes and Presentations the same time period. The big picture is that none of these Experience suggests that freestanding AAA activities can forecasters called the severity of the downturn before it be useful to country authorities and other stakeholders, started to be felt in the global economy and in the markets though the activities may not be captured in standard in a major way. In September 2008, when Lehman Brothers Bank reporting. Government feedback regarding AAA was collapsed, the Bank was still anticipating global growth of 3 positive in several cases. In one case, the authorities singled percent for 2009, with the IMF predicting only somewhat out technical assistance in the design, execution, and evalu- less, though the Economist Intelligence Unit forecast was ation of financial-crisis simulation exercises funded by the already down to 2 percent--with neither the Bank nor the Bank budget and a grant from the FIRST Initiative. In anoth- IMF moving into the red zone for 2009 until the year had er case, officials appreciated the Bank's just-in-time review of actually begun.16 28 | The World Bank Group's Response to the Global Economic Crisis gure 2.1 FIGURE 3.3 The Evolving Forecast for 2009: The Bank and Others Sources: World Bank, IMF, consensus, and Economist Intelligence Unit. Early Warnings and Alerts on its main theme of multilateralism and markets; the IMF's While the Bank was broadly aligned with comparators' main theme was the crisis itself and the urgency of acting views on the forecast, it could have disseminated the up- quickly and comprehensively. Also, though less notable, dif- dated forecasts to clients and the broader international ferences characterized the two institutions' reports to the community in a more timely manner. Figure 3.3 suggests Development Committee (See Development Committee that the IMF lowered its official forecast for 2009 in October 2008a, b). 2008, just before the Annual Meetings, while the Bank's of- There were many reasons for the IMF to have reacted ficial pre-crisis forecast was unchanged until its November quickly to this particular crisis. Not least of these reasons 2008 report (just after the Annual Meetings). Nevertheless, was the origin of the crisis in the financial sectors of the ad- the Bank had lowered an unofficial forecast before the An- vanced economies, where the Fund has an important man- nual Meetings, and when the official forecast was revised, it date and role in bilateral surveillance through the Article IV lowered the 2009 global growth forecast more than the IMF Consultation process and multilateral surveillance, as re- did--from 3 percent to 0.9 percent, compared with the IMF's flected inter alia in its work on the World Economic Outlook successive cuts from 2.6 percent in April, to 1.9 percent in and the Global Financial Stability Report. The Fund's inde- October, and 1.1 percent in November. pendent evaluation office is looking into the effectiveness of the institution in anticipating the crisis (IEO 2010). The Bank and the IMF said many similar things at the 2008 Annual Meetings, but with major differences in the Several internal Bank issues also may have contributed to emphasis they placed on the crisis and the messages con- the differences in institutional approaches and initial de- veyed. The Annual Meetings statements of both the Bank lays in response. For the Bank's part, while the crisis began and the IMF on October 13, 2008 (see Kahn 2008; Zoellick in Organisation for Economic Co-operation and Develop- 2008) acknowledged the recent financial shocks and the ment countries, global interdependence necessitated a high risks they carried, on top of the earlier food and fuel shocks, state of readiness. Interviews with Bank staff, clients, and which were then subsiding. The Bank's statement focused partners pointed to factors that individual senior manag- The World Bank Group's Response | 29 ers were grappling with at the time, as well as organizational Once international financial markets seized up, demand for fragmentation across network leadership, DEC, and in re- IBRD financing surged, even from investment-grade borrow- spect to the financial sector, which some saw as diminishing ers. The focus quickly shifted from what to do with the "excess" the Bank's ability to connect the dots between macroeco- IBRD capital to how to ration it among borrowing member- nomic and financial sector developments. Country offices countries and how to increase IBRD capital to support higher also reported that they often relied on IMF forecasts, rather lending levels. The timeline in box 3.4 shows the progression of than any generated by the Bank, indicating a lack of connec- Development Committee thinking, starting with an April 2008 tivity between country and global forecasting. focus on ways of "deploying capital more effectively" and lead- ing to endorsement of a capital increase two years later. Operational Organization and Capital Adequacy Internally, the OPCS-led Crisis-Response Working Group During the early phase of the crisis response, the Bank cap- played a critical role in managing the Bank's IBRD re- italized on the relationships of country teams with clients sponse. Within the Working Group, the Bank's Country and partners. The Bank's larger readiness challenge was inter- Credit Risk Department-- building on a framework devel- nal: the instruments and modalities by which country teams oped earlier for determining lending envelopes incorpo- would be able to respond to country requests for increased rated in country assistance strategies--had responsibility financing, especially DPOs from IBRD borrowers. The Bank for ensuring (i) that the IBRD single-borrower limit was not benefited from having in place a core set of flexible instru- breached; (ii) that when exposure to non-investment-grade ments--both for investment and development policy lend- countries rose, it was accompanied by policies that boosted ing--though there remain important pending issues, such as country creditworthiness; and (iii) that the level of risk-ad- maturities, which in some cases may be too long for what are justed capital required to support the lending (determined essentially liquidity operations, as discussed in chapter 4. on the basis of the Country Credit Risk Department 's cred- On the modalities, the priority was to put in place a mech- itworthiness analysis) was taken into account, available, and anism for rapid review--which the Bank did soon after the fairly distributed relative to other requests. 2008 Annual Meetings, through a Crisis-Response Working The IDA situation was very different from that of the Group--taking into account Board-approved operational IBRD. The food and fuel crises had more adversely affected policies and IBRD country creditworthiness requirements IDA borrowers than others, and as that crisis waned and and financial availabilities. During this process, the Bank the global economic crisis deepened, the situation of some built on longstanding institutional arrangements, such as IDA borrowers actually improved, at least temporarily. In the Operations Committee, for management review of ma- addition, the IDA allocation process is very different from jor lending increases, and on the country directors' group, that of the IBRD, with almost all resources allocated across which remains an important vehicle for cross-fertilization countries on the basis of the IDA performance-based al- and communications among country directors and between location system. In the circumstances, IDA resources were country directors and Operations Policy and Country Ser- largely spoken for at the start of the crisis. Increases could vices (OPCS) and other central units.17 only come from front-loading the lending or through mobi- The Bank would not have been able to respond as it did if lization of additional donor resources through special trust it had not been so well positioned financially when the cri- funds in the context of the IDA Fast-Track Facility and the sis started. The IBRD went into the crisis with an equity-to- Vulnerability Financing Facility. Though the former was loans ratio of 38 percent, compared with a target range of 23 generally well received, the latter bred controversy and con- ­ 27 percent, which gave it substantial room to expand lend- fusion at the outset, undermining the Bank's leadership, both ing. The IDA15 operational period, which had just become internally and externally. effective on July 1, 2008, had increased available resources An external debate concerned the Bank proposal at the for commitments by about 25 percent. Of course, neither of G-20 Meetings in March 2009 that advanced countries these developments reflected specific plans for dealing with should contribute 0.7 percent of their stimulus packages the global crisis. IBRD's crisis response benefited from the to a Vulnerability Fund for development. This idea was very low pre-crisis demand for IBRD financing from MICs, received positively by many developing countries, because especially those with investment-grade financial markets, the Bank was speaking for them, but not by many advanced such as Mexico, which had prepaid the Bank for earlier loans economies and IDA deputies, some of whose governments as part of its own external liability management programs, were not in a position domestically to contribute. They opening headroom for borrowing in the event of a crisis. also saw the proposal as conflicting with the IDA replen- 30 | The World Bank Group's Response to the Global Economic Crisis BOX 3.4 IBRD CAPITAL ADEQUACY: EVOLUTION OF DEVELOPMENT COMMITTEE VIEWS April 13, 2008 "We ... look forward to the results of the strategic review of IBRD capital and progress on deploying capital more effectively for development impact." October 12, 2008 "IBRD has the financial capacity to comfortably double its annual lending to developing countries to meet additional demand from clients. IBRD lending was US$13.5 billion last fiscal year." April 26, 2009 "We confirmed our support for making optimal use of IBRD's balance sheet with lending of up to $100 billion over three years. Given the possibility of a slow recovery, we considered the potential need to deploy additional resources and asked the Bank Group to review the financial capacity, including the capital adequacy, of IBRD and IFC, and the adequacy of the concessional resources going to IDA countries, for our further consideration at the 2009 Annual Meetings." October 5, 2009 "We welcomed the progress in examining measures to improve the Bank Group's financial capacity and sustainability. We committed to ensure that the Bank Group has sufficient resources to meet future development challenges, and asked for an updated review, including on the Bank Group's general capital increase needs, to be completed by Spring 2010 for decision." April 25, 2010 "The Bank Group must remain financially strong. We endorsed a general capital increase for IBRD of $58.4 billion of which 6percent, or $3.5 billion, would be paid in capital, as set out in the paper Review of IBRD and IFC Financial Capacities. We further endorsed related matters contained in that paper as well as in Synthesis Paper-New World, New World Bank Group, including a reform of loan maturity terms to be discussed at the integrated financial review in June 2010." Sources: Development Committee Communiqués, dates as above. ishment program. Instead, they were looking for the Bank ing Global Food Response Program and a new Rapid So- to pursue targeted safety net programs that might be used cial Response Program, as discussed earlier in this chapter in conjunction with DPOs. In due course, the proposed in the context of box 3.1. Alongside these developments, Vulnerability Fund was overtaken by the Vulnerability some IDA deputies also were pushing for an IDA crisis- Financing Framework, which came to include the exist- response window, which was ultimately agreed and funded TABLE 3.4 World Bank Operational Productivity for New Lending Productivity Average project Country (projects per Productivity Lending (US$ Projects size services budget US$1 million in (US$ lent per US$1 Fiscal year billions) (number) (US$ millions) (US$ millions) budget) million in budget) 2001 17.8 254 70.3 402 .63 4.42 2002 19.6 244 80.5 493 .49 3.98 2003 18.6 260 71.5 526 .49 3.54 2004 20.2 258 78.2 589 .44 3.43 2005 22.3 298 74.9 590 .51 3.78 2006 23.6 298 79.3 619 .48 3.81 2007 24.7 320 77.3 616 .52 4.01 2008 24.7 319 77.4 658 .48 3.75 2009 46.9 329 142.6 685 .48 6.85 2010 58.7 385 152.6 725 .53 8.10 Source: World Bank data. The World Bank Group's Response | 31 as a pilot for IDA15--after management found additional The case study evidence presents a positive picture of funds that could be allocated for crisis support outside the the Bank's coordination with country counterparts, performance-based system--to be considered for possible although there are exceptions. Authorities interviewed mainstreaming in IDA16 (see World Bank 2010e). praised Bank staff for their specific expertise--especially in drawing on analytic work--genuine commitment to coun- Operational Budgets and Productivity try ownership, and eagerness to help. In one noteworthy The Bank budget for country services rose at an annual case, the authorities said that in the fiscal 1998­99 crisis, (nominal) rate of 5 percent in fiscal 2009­10 (appendix table the Bank had been part of the problem, but in this crisis the A13). This is small relative to the increase in lending, and raises Bank was part of the solution. However, there were com- questions about its adequacy for sustaining quality. Preliminary plaints, especially related to timeliness and indecision, with analysis suggests that when productivity is measured on a per- the authorities of one country noting that the Bank loan dollar-lent basis--by the elasticity of lending volumes with re- had been approved only after the country no longer needed spect to the Bank budget for country services--it rose sharply the funding. in fiscal 2009 and 2010 (by about 50 percent per year). How- The consultations with LICs carried out in August 2009 ever, when measured on a per-project basis, productivity in fis- in preparation for the G-20 meeting provide evidence of cal 2009­10 was more in line with historical averages. By both countries' appreciation of the Bank's response, but also of measures, the productivity increase was concentrated in lending complaints about the speed of that response. Some partici- preparation, compared with supervision and AAA, although pants complained about procedural delays, lack of flexibility the shares of supervision and AAA in country services budgets in diverging from the Country Assistance Strategy, and the have increased relative to lending preparation. The increase in need for an IDA crisis window. For many participants, the the supervision budget share may be related to the surge in use effectiveness of the Bank's response compared unfavorably of loan supplements (additional finance), which started in fiscal with that of the IMF and the regional development banks. 2007 and continued throughout fiscal 2009­10, primarily for Echoing a theme developed earlier in this chapter, the con- investment loans.18 The increase in the share of AAA may be sultation report to the G-20 states: "It was suggested that related to the surge in DPOs. But in both cases, more analysis although the World Bank responds quickly to crises, actual (and data) is needed for a fuller assessment. disbursement of financial support is often very slow."20 The difference between the two productivity measures re- IMF flects a doubling of the average project size between fiscal 2007­08 and 2009­10. This included the doubling of IBRD Bank-Fund collaboration, which had been a major problem loan size and a 31 percent increase in IDA credit size. For the during the East Asian crisis, appears to have been better IBRD, the increased loan size was in both DPOs and investment this time. Indeed, the staff survey carried out for the recent lending, as discussed earlier. However, the increase in IBRD Joint Management Action Plan on Bank-Fund Collabora- investment loans in fiscal 2009 offset a decline in fiscal 2008; tion review found that 35­40 percent of Bank and Fund staff hence, the main increase was for DPOs. The analysis of changes thought that the crisis had improved collaborations, with the from the lending plans in country partnership strategies high- remainder reporting no change or no opinion (World Bank lights additional large loans in Indonesia, Mexico, and Ukraine. and IMF 2010) (figure 3.4). The improvement appears to have Case studies pointed to budget trade-off problems in Ukraine, reflected several factors. First, the Fund had moved quite sub- but not in Indonesia or Mexico. For IDA, the increase in num- stantially away from setting structural conditionality, remov- bers of operations came in fiscal 2007­08. The number of IDA ing an important area of tension between the staff of the two operations declined in fiscal 2009 by 11 percent compared with institutions. Second, the biggest staff disagreements during fiscal 2008, before partially recovering in fiscal 2010. the East Asian crisis had been around programs in the Re- gion; this time there were few such programs. Only Indonesia External Coordination and Vietnam have IBRD DPOs, and neither of them have an Country Counterparts IMF program (IMF programs concentrated on Eastern Eu- The main evaluation evidence on the effectiveness of the rope, Central Asia, and Latin America--the last through flex- Bank's coordination with country counterparts comes ible credit lines). from interviews with authorities in the 11 case study Third, fiscal space, which has usually been the source of countries. It also includes feedback from LICs on the Bank's much friction between Bank and Fund teams, has been crisis response performance that was collected during the less of a factor this time. This is due to the global consensus G-20 preparations in August 2009.19 on the need for countercyclical policies and stimulus rather 32 | The World Bank Group's Response to the Global Economic Crisis gure 2.1 FIGURE 3.4 Impact of Crises on Bank-Fund Collaboration in LICs and MICs Source: World Bank and IMF 2010. than belt-tightening, as well as the better fiscal and debt po- engendered acrimonious debate within the Bank-Fund Fi- sitions of many countries at the outset of the crisis. Finally, nancial Sector Liaison Committee, was resolved by the two the division of labor between the two institutions on the Fi- Boards in 2009, reaffirming the existing arrangements. Criti- nancial Sector Assessment Program, which had sometimes cal country-level work had continued relatively unimpeded BOX 3.5 WHAT LOWINCOME COUNTRIES SAY ABOUT THE BANK'S CRISIS PERFORMANCE Countries indicated that there is a need for the Bank to rationalize facilities, sectors, and projects within Country Assistance Strategies, to ensure greater coherence and prioritization, as well as higher contingencies within each Country Assistance Strategy and overall IDA envelopes to allow reallocation to confront crises or shocks. It was suggested that the World Bank had been less responsive in the wake of the crisis, and their actions less visible, than the IMF and other regional institutions, especially in Africa, although the reverse may have been the case in Central America. It was suggested that the World Bank, and IDA in particular, should have a crisis window, so that IDA could respond adequately and quickly in times of crises. Moreover, it was suggested that there should be greater clarification on the range of instruments available as well as the process of accessing them, because countries felt that that there had been poor information dissemination and discussion of the new mechanisms established to respond to the financial crisis. Some countries felt the Bank's response to the crisis had been rapid and significant. However, many did not, because of delays in procedures, excessive conditions, and lack of transparency/predictability in decisions on which countries could access budget support. Countries also suggested allocating higher levels of World Bank funds to anti-shock budget support, making the recent increase permanent to help countries respond to all shocks, rather than just the current global crisis. Overall, countries ... urged an earlier and larger IDA replenishment but also agreement on a more permanent mechanism to fund fast- tracking/front-loading of resources in crises (both globally and for individual countries) without advancing replenishments, perhaps using IBRD resources. They also need to be able to access more IBRD funds, blended with IDA, for high-return public sector projects. Very slow approval and disbursement processes and excessive numbers of missions are undermining the Bank's usefulness against the crisis. In terms of transaction costs and delay, the Bank is `not very good at doing business.' Countries reported mixed experiences relating to the timeliness of the World Bank's response to crises. Some countries had received financial support very rapidly, while others noted that World Bank support had been sluggish. It was suggested that although the World Bank responds quickly to crises, actual disbursement of financial support is often very slow. Source: G-20 Chair Consultations of LICs on Flexibility and Adaptability of IFIs in Freetown (8/14/09) and London (8/17/09). http://www.development- finance.org/en/news/205-g20-consults-lics.html The World Bank Group's Response | 33 throughout the period of debate, but with some remaining and general reserves compared with risk-weighted assets-- tensions (World Bank and IMF 2009). fell from 48 percent to 44 percent between June 2008 and June 2009, but stayed well above the Board requirement of Other Partners 30 percent (and also above similar ratios for highly rated The evidence also points to better coordination with other commercial banks).21 partners--especially at the country level. This included External assessments endorsed this view. In February 2009, the regional development banks, bilateral and multilateral for example, Standard and Poor's reported that IFC had am- donors, UN agencies, and private charitable organizations. ple capital and liquidity, given the riskiness of its investment Though there is evidence of some tension in these relation- portfolio and taking into account that, unlike other multilat- ships, they are far more productive than in earlier crises and erals, IFC did not have callable capital to draw on (Standard reflect considerable progress. and Poor's 2009). IFC Response IFC conservatively projected a modest 5 percent increase in new business between fiscal 2009 and 2011, with mobiliza- IFC's strategic intention was to provide a timely and effec- tion of significant additional financing through new global tive response, but this response was developed amid con- initiatives. Recognizing that a prolonged recession could ab- cerns about how the crisis might adversely affect IFC's fi- sorb more of the capital cushion, IFC conservatively estimated nancial capacity. In the pre-crisis years of fiscal 2005­08, IFC that it could invest around 5 percent more per year in fiscal had recorded strong profits (average of $1.8 billion per year), 2009­11 than in fiscal 2008 ($12 billion, compared with $11.4 which had enabled it to approximately double its investments billion). IFC sought to supplement its own funds through new and to commit to a transfer of $1.75 billion to IDA between global initiatives, which would raise up to $24 billion between fiscal years 2008 and 2010. The crisis changed IFC's income fiscal 2009 and 2011. The following section examines those outlook, with the expectation of significant equity write- global initiatives, then the actions taken through IFC's regular downs and a rising number of nonperforming loans--as had business (portfolio management and new business). happened in past crises. IFC accordingly prioritized efforts to protect its existing portfolio and minimize losses. New Global Initiatives To leverage its capital and its role, IFC designed a range of Though its balance sheet was impaired by the crisis, IFC global crisis initiatives focused on mobilizing resources from remained relatively well capitalized--well above Board governments and other development finance institutions targets. Allowing for a three-year crisis, IFC expected to (DFIs). As of June 2010, six of IFC's global crisis initiatives were support a modest countercyclical response through its own active and three were in development. The active initiatives, in- account and through new global partnerships. IFC experi- volving expected financing of up to $29 billion ($5 billion from enced substantial equity write-downs on its portfolio, some IFC) between fiscal 2009 and 2012, are as follows: $1 billion, but stayed well capitalized relative to Board re- quirements. IFC's capital adequacy ratio--retained earnings · Trade (Global Trade Liquidity Program, GTLP): In this program of up to $5 billion, IFC and its program partners--including the Department for International Development, the Commonwealth Development Cor- poration, and the African Development Bank (AfDB)-- share risk on the trade portfolios of major international banks or short-term loans to smaller or regional banks without the risk-sharing component. This complements an expansion in the existing Global Trade Finance Pro- gram (GTFP), set up in 2005 to provide risk mitigation for counter-party bank risk on trade transactions. Both platforms are run by IFC teams. · Microfinance (Microfinance Enhancement Facility): This $500 million facility is expected to provide loan refinanc- ing to more than 100 strong microfinance institutions in up to 40 countries (including 20 IDA countries). The Photo courtesy of Guiseppe Franchini/World Bank. financing, from IFC, the German Development Bank 34 | The World Bank Group's Response to the Global Economic Crisis (KfW), and other development partners (including the and debt restructuring. With this goal in mind, in August European Investment Bank and Austrian, Dutch, Ger- 2009 IFC created the Distressed Asset Recovery Program. man, Swedish, and OPEC DFIs), is intended to support Box 3.6 provides some examples of projects supported by lending by microfinance institutions of up to $84 billion the IFC crisis initiatives. to as many as 60 million low-income borrowers by 2014. The phased approach notwithstanding, relative to progress The facility is being run by three external fund managers: indicators that IFC established at the outset for the new Blue Orchard Finance, Cyrano Fund Management, and initiatives, implementation is well behind schedule. By the ResponsAbility Social Investments AG. end of fiscal 2010, IFC expected to have deployed $6.1 to $8.1 · Bank Capitalization (IFC Capitalization Fund): This billion through the initiatives. As of June 30, 2010, around global equity and subordinated debt fund of up to $3 $9.2 billion had been mobilized for these initiatives (about billion (originally $5 billion) is overseen by a newly cre- half from partners), with $2.8 billion actually committed ated IFC subsidiary, the Asset Management Company,22 but only $1.9 billion disbursed (table 3.5). Of the new initia- which aims to support banks with systemic impact.23 tives, the GTLP is the only one anywhere close to target, with · Infrastructure (Infrastructure Crisis Facility): This debt roughly two-thirds of the low-end target for deployment--in facility of up to $8 billion and equity fund of up to $2 bil- this case expected to be achieved by October 2009--commit- lion, both managed by third parties, is intended to support ted at the end of June 2010 and around one-half actually dis- about 100 viable privately funded infrastructure projects bursed. Figure 3.5 shows the pace of implementation of the facing temporary financing problems. The facility also an- initiatives quarter by quarter, indicating that implementation ticipated an advisory services component to help govern- speed is gradually picking up. ments design or redesign public-private partnerships. Regional Initiatives · Debt and Asset Recovery Program: This IFC-run pro- At the Regional level, IFC has participated in joint initia- gram of $6­8.5 billion includes direct debt, quasi-debt, tives with other IFIs in Europe and Central Asia, Latin and equity investments to directly support corporate America and the Caribbean, and Sub-Saharan Africa. These debt restructuring as well as investments in nonperform- initiatives have relied less on new crisis products than ing loan pools. envisaged: · Advisory Services: Alongside relevant ongoing activities, · Europe and Central Asia: IFC is part of a joint IFI IFC is aiming to raise $30 million of new donor funding Action Plan for Central and Eastern Europe aimed at to help improve the financial infrastructure and enhance supporting banking sector stability and lending to the risk management through government and firm-level in- real economy in the region. Under the Action Plan, terventions. launched in February 2009, the European Bank for Re- The initiatives were structured as a three-phase chronolog- construction and Development (EBRD), the European ical approach to tackling the crisis. In the first phase, IFC Investment Bank Group (EIB), and the World Bank concentrated its efforts on providing access to short-term Group pledged to provide up to 24.5 billion and de- liquidity, particularly through its trade finance programs ploy rapid, coordinated assistance according to each (GTFP and GTLP), with the understanding that short-term institution's geographical and product remit. IFC prom- liquidity would be needed to stave off the decline in real sec- ised to provide up to 2 billion, intervening mainly tor production, and thus reduce the likelihood or severity of through its crisis-response initiatives, to complement longer-term liquidity-related impacts. its traditional investment and advisory services in the region. As of June 2010, IFC had committed approxi- The second phase of the strategy focused on providing mately $2.2 billion, mainly through traditional means longer-term liquidity and equity capital to select sectors ($1.4 billion), as opposed to the new initiatives ($780 and market segments. This was designed to reduce solvency million). The Action Plan includes efforts to coordinate issues that come about through prolonged limited access national support packages and policy dialogue among to credit. IFC accordingly launched the Infrastructure Cri- key stakeholders in the region, in close collaboration sis Facility (ICF), the Microfinance Enhancement Facility with the IMF, the European Commission, and other key (MEF), and the IFC Capitalization Fund in early 2009. European institutions. This effort, the European Bank The third phase of the response strategy is intended to ac- Coordination Initiative (informally known as Vienna celerate the recovery. The main focus intended for this third Initiative), is a novel public-private platform for policy phase is the resolution of troubled assets, debt refinancing, dialogue and crisis management coordination. The World Bank Group's Response | 35 BOX 3.6 EXAMPLES OF PROJECTS ORIGINATED THROUGH THE IFC CRISIS INITIATIVES GTFP: Trades supported include shipments of paper from Indonesia to Nigeria, textiles from China to Bangladesh, milled flour from Egypt to Sierra Leone, car tires from Turkey to Azerbaijan, peas from Ukraine to the West Bank and Gaza, wheat from Russia to Pakistan, and motor vehicle parts from Brazil to Bolivia. Median guarantee value is around $150,000. GTLP: Projects include a $500 million investment to share the risk with Standard Chartered Bank on its trade finance portfolio through the purchase of 40 percent of eligible pools of their short-term trade receivables, so that the bank can scale up its trade finance activities. GTLP has also supported a $100 million, 1-year unsecured loan to Standard Bank of South Africa to support liquidity for trade finance, including but not limited to supporting trade of consumer and intermediate goods as well as smaller machinery and commodities in the region. This line recently supported an award- winning cocoa deal in Nigeria. Bank Capitalization: Projects include a $61 million equity investment in Komercijalna Banka, Serbia, a bank with 8 percent market share. The bank is seen as systemically important, but it is facing capital constraints due to the crisis. Other IFIs (European Bank for Reconstruction and Development, Swedfund, and the German development bank DEG) have also participated in the recapitalization. Microfinance: Projects include a $3 million loan to Fondo de Desarrollo Local, a Nicaragua microfinance institution, to maintain its lending in the crisis. Infrastructure: A port project in Vietnam, originally approved in 2007, became vulnerable when the country was hit with country-specific shocks and the global crisis. IFC helped the project sponsors restructure the $155 million debt-financing package, including a contribution of $10 million from the Infrastructure Crisis Facility. Expected long-term impacts include increased container capacity, relieving congestion in and around Ho Chi Minh City, and cost savings through the ability to handle larger container ships. Debt and Asset Recovery: The platform has supported a $5 million equity investment to support creation of a debt resolution capacity in Colombia, which would increase the liquidity available to participating financial institutions and contribute to the development of a nonperforming loan market. Advisory Services: As of June 2010, IFC had organized 47 banking sector workshops and conferences in 28 countries, covering 280 banks, to share knowledge on risk management and nonperforming loan resolution, and has engaged in diagnostics and in-depth advisory work with 27 banks in Europe and Central Asia, the Middle East and North Africa, Latin America and the Caribbean, and Africa. Source: IEG. · Latin America and the Caribbean: The Multilateral Crisis America and the Caribbean reached $5.5 billion, with Initiative for Latin America and the Caribbean, launched roughly two-thirds of this amount coming from its rou- in April 2009, was organized to pool global financing from tine operations ($3.5 billion), and one-third from crisis public and private sources and to scale up crisis-response initiatives such as the GTFP, the Microfinance Enhance- initiatives.24 Partners in this initiative are the IBRD, the ment Fund (MEF), and the IFC Capitalization Fund Caribbean Development Bank, the Central American ($2.0 billion). Bank for Economic Integration, the Andean Development · Sub-Saharan Africa: The Joint IFI Action Plan for Africa, Corporation (Corporacion Andina de Fomento), and the launched in May 2009, is designed to leverage additional Inter-American Development Bank. Together, the IFIs financing, protect important ongoing programs, and have pledged to provide up to $90 billion to support the support investment-ready initiatives. Other participants private sector in Latin America and the Caribbean. IFC's include the AfDB, AFD, EIB, KfW and DEG, Proparco, expected contribution is $7.8 billion for fiscal 2009 and the Development Bank of Southern Africa (DBSA), the 2010, covering facilitating trade through the GTFP and Islamic Development Bank (IsDB), and the Netherlands GTLP; strengthening the financial sector using the IFC Development Finance Company (FMO). Under the plan, Capitalization Fund; improving infrastructure through commitments to the Region are expected to be increased the Infrastructure Crisis Facility; and increasing micro- by at least $15 billion through 2012. Of this, IFC is ex- finance lending. IFC has fallen short of the $7.8 billion pected to contribute at least $1 billion to facilitate trade, goal. The two-year total for investment lending in Latin mainly through the GTFP and GTLP; strengthen the 36 | The World Bank Group's Response to the Global Economic Crisis TABLE 3.5 IFC's Crisis Initiatives: Funding and Deployment Funding Deployment Target Actual commitments Actual disbursement Initiative Target Actual mobilization (by end fiscal 2010) (6/30/10) (6/30/10) Annual program N/A (unfunded Global Trade Finance ceiling raised to N/A (supported by guarantee Program (GTFP) $3 billion IFC capital base) program) $5.8 billion N/A $1.45 billion, Global Trade Liquidity partners Program (GTLP) Up to $5 billion $1 billion IFC $3 to 5 billiona $1.9 billion $1.5 billion Up to $3 billion $2 billion JBIC IFC Capitalization Fund (originally $5 billion) $1 billion IFC $1.6 billion $395 million $208 million $292 million, Microfinance partners Enhancement Fund $500 million $150 million IFC $0.47 billion $122 million $92 million Up to $10 billion $1 billion, Infrastructure Crisis ($8 billion debt and partners Facility $2 billion equity) $300 million IFC $0.52 billionb $45 million $12.3 million $300 million, Debt and Asset partners Recovery Program $6­8.5 billion $1.6 billion IFC $0.5 billion $300 million $69 million $30 million (revised down from $16.1 million, Advisory Services $60 million) partners $20 million $10.7 million $2.7 million $6.1 to Total new partnershipsc $24.5 to 27 billion $9.2 billion 8.1 billion $2.8 billion $1.9 billion Percent of target 35 46 31 Source: IFC. Note: Amounts as of June 30, 2010. Table does not include parallel financing for GTLP ($1.5 billion, from Japan Bank for International Cooperation) and the Infrastructure Crisis Facility ($3.5 billion). a. In March 2009, the IFC anticipated full deployment of $3­5 billion by October 2009. b. In December 2008, IFC described a "satisfactory" result as 40 percent of committed capital invested within one year--$0.52 billion is 40 percent of $1.3 billion. c. Excludes GTFP, as (i) an existing program that was extended, and (ii) given its unfunded guarantee nature. capital base of banks using the IFC Capitalization Fund; and the Regional Micro, Small, and Medium Enterprises improve infrastructure, including through the Infra- Investment Fund for Africa, which is solely focused on structure Crisis Facility; increase microfinance and small Sub-Saharan Africa, is pending commitment by IFC.25 and medium enterprise (SME) lending; and promote Core Business Response agribusiness. To date, implementation under the trade fi- Prior to the crisis, IFC set out a two-sided core business nance initiatives has been solid, with several major global approach to a possible downturn: countercyclical invest- and regional banks signing up with the GTLP, including ments, particularly in MICs, and prudent management Standard Bank of South Africa and Afreximbank, and of the portfolio. The corporate strategy of early 2008 envis- increasing GTFP volumes. A specific Africa capitaliza- aged proactive countercyclical support for companies fac- tion fund with funding from the AfDB, the EIB, and the ing liquidity constraints in order for them to continue to do OPEC Fund for International Development, alongside business during the crisis. The strategy also pointed to the IFC, has also been launched. Under the microfinance pil- need for prudent portfolio management, focusing on careful lar, MEF is expected to disburse about 10 percent of its supervision of at-risk investments to maintain the health of funding to projects in Africa (no commitments to date) IFC's balance sheet. As part of the annual strategy exercise, The World Bank Group's Response | 37 gure 2.1 FIGURE 3.5 Implementation of IFC's Global Crisis Initiatives Source: IFC. industry and Regional departments were asked to draw up portfolio, where the ratio of new business to portfolio manage- countercyclical plans, including both more proactive risk ment staff fell from five to one in 2008 to two to one in 2010. taking and hedging strategies, as well as consideration of Both the real and infrastructure sectors also saw shifts of staff how advisory services could be deployed in support of in- to portfolio management, though of a lesser magnitude (table vestment clients (IFC 2008). 3.6). With this extra support, IFC carried out stress testing of As in past crises, IFC's initial core business response was its portfolio of clients in each Region (the financial sector first, largely defensive: to minimize losses and protect the finan- then the real sector). Highlighting IFC's determination to en- cial sustainability of its portfolio. IFC assigned investment sure the profitability of its portfolio and help clients cope with staff usually engaged in new business to portfolio work. This the crisis, in the early months of the crisis, senior managers was especially true in IFC's relatively large financial sector visited all IFC's main clients in the field to extend their support TABLE 3.6 Staff Mix in IFC Investment Operations, 2008­10 Fiscal year New business Portfolio management Ratio Full-time equivalent staff members 2008 367.1 72.5 5.1 2009 407.0 111.9 3.6 2010 543.0 160.5 3.3 Ratio of full-time equivalent new business: portfolio management staff Real sector Infrastructure Financial markets 2008 5.1 5.4 4.5 2009 3.5 4.6 2.8 2010 4.0 4.2 2.3 Source: IFC. Note: Includes staff involved in IFC Investment Operations (charged to a project) who are grade F2 and above. 38 | The World Bank Group's Response to the Global Economic Crisis and advice. In department scorecards, greater attention than IFC's IDA focus was maintained during fiscal 2009­10, before was given to portfolio management quality, which was with investment volume in IDA countries increasing 24 made into a focus indicator. percent between fiscal 2008 and 2010, from $3.2 to $4 bil- lion. During fiscal 2009, nearly a half of new commitments New IFC business activity, which had more than doubled (by number of projects) were in IDA countries (IDA and IDA from 2005 to 2008 (figure 3.6), like private capital flows blend). Conversely, IFC's investment volume in larger non- overall, slowed considerably as the crisis took hold. Given IDA countries fell in fiscal 2009, with volumes only picking the uncertainty associated with the impact of the crisis on up in the last quarter of fiscal 2010, and thereby helping the IFC's balance sheet, volume targets for new business in fis- annual figure for fiscal 2010 to edge above the level achieved cal 2009 were suspended.26 Pricing was also changed to reflect in fiscal 2008 (figure 3.8). Table 3.7 shows the main individ- revised country-risk perceptions. The volume of new business ual country shifts within the IDA/IDA blend and non-IDA dipped sharply in the middle of the fiscal year, especially in country groupings in the first 15 months of the crisis, between Europe and Central Asia and Latin America and the Carib- September 2008 and December 2009. Box 3.7 offers several bean, as deals in the pipeline were put on hold or dropped. examples of IFC's activities in each of the countries during the IFC's gross commitments fell to $10.5 billion in fiscal 2009 crisis period. from $11.4 billion in fiscal 2008, and was some $1.5 billion less than IFC was aiming to achieve ($12 billion).27 Factoring The crisis accelerated a trend in IFC toward short-term fi- in canceled projects, sales, and conversions, net commitments nancing, which had been valuable but relatively limited in were $8.6 billion in fiscal 2009, a fall of 18 percent from the past crises (IEG 2008a). Where new business was pursued, previous year. In fiscal 2010, new business increased by 28 it increasingly involved short-term trade finance guarantees percent, exceeding the level achieved in fiscal 2008. through the GTFP, which use up less capital when committed (about half of that required for a loan), and thus put less pressure The pattern was consistent across Regions, with the ex- on the balance sheet.28 The volume of GTFP transactions more ception of Sub-Saharan Africa, where new business in- than doubled between fiscal 2008 and 2010, while the volume of creased. In most Regions, IFC's new business between fiscal loans fell by around 20 percent. Equity commitments were rela- 2008 and 2010 was v-shaped, with an especially deep dip in tively stable, and these patterns continued into fiscal 2010. The the Region hardest hit by the crisis, Europe and Central Asia dramatic shift in instrument mix over the crisis period is shown (figure 3.7). Sub-Saharan Africa was the notable exception; in figure 3.9. GTFP commitments rose from 14 percent of IFC's the pre-crisis upward trajectory of new business was main- new commitments in fiscal 2008 to 31 percent in 2010. tained in fiscal 2009 and 2010. gure 2.1 FIGURE 3.6 IFC Investment Commitments, Fiscal Years 2005­10 Source: IFC. The World Bank Group's Response | 39 gure 2.1 FIGURE 3.7 Net IFC Commitments by Region, Fiscal Years 2008­10 Source: IFC. By sector, in keeping with the increase in trade finance, there both in absolute and relative terms (figure 3.10). Within these has been a significant shift in the balance of resource alloca- clusters, physical infrastructure (particularly electric power) and tion toward financial sector investments. There has been a food and agribusiness (agriculture and forestry in particular) in- substantial decline in infrastructure and real sector investments, vestments declined most during the crisis period (table 3.8). gure 2.1 FIGURE 3.8 Net IFC Commitments by IDA Status, Fiscal Years 2006­10 Source: IFC. 40 | The World Bank Group's Response to the Global Economic Crisis TABLE 3.7 Countries with Largest Net Commitment Changes by IDA Status Top 5 countries with increases Top 5 countries with decreases (July 2007 ­Sept. 2008 versus (July 2007 ­Sept. 2008 versus Country grouping Oct. 2008 ­Dec. 2009) Oct. 2008 ­Dec. 2009) IDA/IDA blend 1. Ghana ($293 million) 1. India (­$395 million) 2. Pakistan ($263 million) 2. Sri Lanka (­$169 million) 3. Georgia ($139 million) 3. Nigeria (­$109 million) 4. Vietnam ($82 million) 4. Kenya (­$90 million) 5. Congo, Dem. Rep. ($55 million) 5. Cambodia (­$74 million) Non-IDA 1. Panama ($306 million) 1. Philippines (­$556 million) 2. Kazakhstan ($268 million) 2. Russian Federation (­$492 million) 3. Romania ($216 million) 3. Turkey (­$372 million) 4. Iraq ($106 million) 4. Argentina (­$325 million) 5. Chile ($99 million) 5. Peru (­$318 million) Source: IFC. A significant difference with past crises is that IFC has a larg- in fiscal 2008 to $291 million in 2009, and were $268 million er knowledge services capacity, supported mainly by donor in fiscal 2010. New approvals fell by around half in fiscal 2009, contributions and IFC-retained earnings that were set aside although this largely reflects the end of the five-year funding during the boom years.29 Over 1,200 staff are involved in the cycle in Sub-Saharan Africa. Also, in many cases activities delivery of advisory services, compared with less than 100 at could be funded and delivered from existing projects, rather the time of the Asian Crisis in the late 1990s. The vast majority than requiring new projects to be approved. Special crisis- of IFC advisory services staff are based in the field (80 percent), response initiative expenditures have been relatively small to which has afforded IFC the opportunity to adapt its operations date, at $13 million, although many ongoing activities were to help address the crisis needs of clients. Through a special ini- linked to crisis needs, such as corporate governance support tiative, IFC has begun a line of work geared toward resolution to financial institutions in Nigeria and Europe and Central of the nonperforming loans of financial intermediaries, which Asia, trade finance advice in Bangladesh, risk management were expected to rise dramatically as a result of the crisis, and support to microfinance institutions in Morocco, and insol- another aimed at establishing insolvency regimes. vency and bankruptcy regime work in the Ukraine. Additional crisis support through increased advisory ser- MIGA Response vices expenditures has been modest, although many ongo- ing activities have been relevant to the crisis. Overall, IFC MIGA's response to the crisis is built around--but not advisory services expenditures increased from $269 million limited to--a new global Financial Sector Initiative that BOX 3.7 EXAMPLES OF IFC'S CRISISPERIOD INTERVENTIONS IN IDA AND NONIDA COUNTRIES IDA/IDA blend: Georgia - $170 million in loans to two systemic banks, TBC and Bank of Georgia (to which IFC also provided interest rate swaps and trade lines) Ghana ­ $215 million in loans to help Kosmos Energy and Tullow Oil develop the Jubilee offshore oil and gas field Pakistan and Vietnam ­ Significant increases in support for trade finance through the GTFP. Non-IDA: Indonesia, Philippines, and Turkey ­ A highly selective approach to new investments, which resulted in a sharp slowdown in new business Kazakhstan ­ A doubling in investments and a continuation of advisory support to the financial sector. Source: IFC. The World Bank Group's Response | 41 gure 2.1 FIGURE 3.9 IFC Instrument Mix, Fiscal Years 2008 ­10 Source: IFC. focused initially on the Europe and Central Asia Region. border investments for recapitalization or liquidity support Under this initiative, which was discussed with the Board to their subsidiaries. Under this initiative, MIGA announced in March 2009, MIGA is providing extended support to fi- it would provide up to 2 billion in political risk insurance nancial institutions seeking political risk insurance on cross- (gross exposure) to support capital flows into the Europe and TABLE 3.8 Changes in Net IFC Commitments by Subsector Sum of June Sum of October 2007­September 2008­December Percentage Department 2008 (US$) 2009 (US$) US$ Increase increase Funds 566,315,703 839,586,030 273,270,327 48.3 Finance 5,259,294,028 5,569,060,750 309,766,722 5.9 Health and Education 282,504,917 252,882,056 ­29,622,861 ­10.5 General Manufacturing and Services 1,355,263,867 1,200,097,693 ­155,166,174 ­11.4 Oil, Gas, and Mining 839,828,807 589,682,150 ­250,146,657 ­29.8 Chemicals 313,400,588 218,693,291 ­94,707,297 ­30.2 Infrastructure 2,967,799,037 1,721,032,162 ­1,246,766,875 ­42.0 Electric Power 1,653,617,868 589,052,071 ­1,064,565,797 ­64.4 Information 474,966,904 508,029,315 33,062,411 7.0 Transport 841,661,098 568,265,225 ­273,395,873 ­32.5 Utilities ­2,446,833 55,685,551 58,132,384 NA Food and Agribusiness 750,904,067 367,768,730 ­383,135,337 ­51.0 Agribusiness and Forestry 533,925,249 216,251,708 ­317,673,541 ­59.5 Food and Beverages 216,978,818 151,517,022 ­65,461,796 ­30.2 TOTAL 12,335,311,014 10,758,802,862 1,576,508,152 ­12.8 Source: IFC. Note: NA = not applicable. 42 | The World Bank Group's Response to the Global Economic Crisis TABLE 3.9 MIGA Projects and Guarantee TABLE 3.10 MIGA: Volume of Guarantees Volume, Fiscal Years 2008 ­10 Issued by Sector, Fiscal Years 2008 ­10 (percent) 2008 2009 2010 Sector 2008 2009 2010 Gross new guarantees Finance 60 89 65 issued ($ billion) 2.1 1.4 1.5 Guarantees outstanding Agribusiness, Services, (gross exposure) ($ billion) 6.5 7.3 7.7 Manufacturing 4 3 8 Number of new projects Infrastructure 36 8 27 supported 23 20 16 Source: MIGA. Source: MIGA. Note: MIGA priority sector Infrastructure includes Oil, Gas, and Mining. Central Asia Region. Drawing on MIGA's ability to arrange $1.4 ­$1.5 billion in new guarantees in fiscal 2009 and 2010, reinsurance, this could commit up to $1 billion of MIGA net about the same as the years preceding the crisis, but falling exposure in the Region. This initiative is part of the coor- short of MIGA's strategic target of $1.8 billion (table 3.9). At dinated international response to the global financial crisis the same time, MIGA's gross outstanding portfolio of guar- in the Region, specifically the Joint IFI Action Plan in Sup- antees--a measure of the total guarantee coverage MIGA is port of Banking Systems and Lending to the Real Economy currently providing for existing clients--rose steadily over in Central and Eastern Europe. As of the first quarter of fiscal the crisis period, reaching a peak level of $7.7 billion in fiscal 2011, MIGA had provided 11 guarantees for the recapitaliza- 2010 (19 percent more than in fiscal 2008, the initial year of tion of 8 different banks by their parent institution, in 5 dif- the crisis), as more investors held onto their guarantees and ferent countries, bringing MIGA's total cumulative support cancellations declined. (gross exposure) under the Financial Sector Initiative to $1.5 New guarantees issued became increasingly concentrated billion. MIGA has reinsured about 44 percent of this, bring- in the financial sector. MIGA's crisis response initiative re- ing its net exposure to about $840 million. sulted in a large share of its guarantee issuance concentrated MIGA's guarantee volume has remained broadly un- in the Europe and Central Asia Region, and in the financial changed since the crisis began. In line with the weakness sector (table 3.10 and figure 3.11). In the 18 months between in foreign direct investment flows, MIGA's new guarantee the onset of the crisis in September 2008 and March 2010, activity remained at trend levels during the crisis, with some MIGA provided coverage to financial sector projects in the gure 2.1 FIGURE 3.10 Net IFC Commitments by Industry Cluster, Fiscal Years 2008 ­10 Source: IFC. The World Bank Group's Response | 43 gure 2.1 FIGURE 3.11 MIGA: Volume of Guarantees Issued by Region, Fiscal Years 2008 ­10 Source: MIGA. Europe and Central Asia Region for $1.6 billion, almost 86 by freestanding debt or to insure financing of existing percent of MIGA's guarantees issued in that period. Support (brownfield) assets. MIGA's Convention was amended in for infrastructure fell sharply, from just over a third of guar- July 2010, with effect from November 2010. This, together antees in fiscal 2008 to only 8 percent in 2009 and 27 percent with MIGA's recently updated Operational Regulations, in 2010, reflecting a weakening trend in foreign direct in- will allow greater product flexibility. MIGA also needs to vestment during the crisis. Guarantees in IDA countries and address several major internal constraints to its business other MIGA priority areas (South-South investments, IDA, growth, including simplifying cumbersome business pro- and conflict-affected countries) also declined as a share of cesses and revamping and refocusing its business develop- guarantee volume. MIGA's guarantees became increasingly ment activities. The joint marketing agreement signed by concentrated in terms of clients (guarantee holders), with IFC and MIGA in February 2009 is an important initiative, the top two clients accounting for 80 percent of new guaran- giving MIGA access to IFC's field presence and enabling tees issued in fiscal 2009. cross-selling of services.30 This agreement was followed up MIGA's ability to respond to crises has been constrained with an updated and enlarged cooperation agreement in by its Convention--which until its recent amendment March 2010 and with deployment of staff to IFC offices in has limited MIGA's ability to insure projects financed Hong Kong and Singapore. 44 | The World Bank Group's Response to the Global Economic Crisis Chapter 4 Preceding chapters described the main features of the 2008­09 global eco- nomic crisis; its impact on developing countries, including the role of their starting conditions at crisis onset and the transmission mechanisms through which they were affected; as well as the objectives, components, and some detailed features of the Bank Group response. This chapter examines the quality of the Bank Group response, with respect to readiness, relevance, response delivery, and early results (to the extent they can be discerned at this stage). Photo courtesy of Yuri Mechitov/World Bank. Assessment of the World Bank Group Response Preceding chapters described the main features of the 2008­09 global economic crisis; its impact on developing countries, including the role of their starting conditions at crisis onset and the transmission mechanisms through which they were affected; as well as the objectives, components, and some detailed features of the Bank Group response. This chapter examines the quality of the Bank Group response, with respect to readiness, relevance, response delivery, and early results (to the extent they can be discerned at this stage). Because the increased volume of Bank Group financing dur- · The increase in Bank lending benefited all country ing a crisis needs to be matched by quality to achieve results groups, but tended to be greatest for countries that ex- and ensure sustainability, this chapter also examines quality- perienced the largest adverse impacts from the crisis. at-entry aspects of Bank Group operations. As set out in chapter 3, when borrowing countries are divided into three groups according to the impact of the Assessment of World Bank Response crisis, Bank disbursements--the more relevant measure of crisis response-- to the 29 countries in the most-af- Relevance and Quality of the Response fected group increased by more than 113 percent; to the Compared with the Bank's objectives for the response, 36 moderately affected countries, it increased by 84 per- achievements to date have varied. Overall, the assessment cent, and to the 51 least-affected countries, it increased finds the following: by 31 percent. · Response objectives were evident in the statements · The IDA response was much more limited than the IBRD about the proposed lending increase, but Bank com- response. This was due to the more limited availability of munications were less clear regarding what the in- resources for increasing financial support and the prior al- creased lending was expected to achieve, other than location of almost all such resources under the IDA per- "protecting the vulnerable and maintaining public in- formance-based allocation system. However, the IDA Fast- vestment in infrastructure." The vagueness of these ob- Track Facility did help to reduce processing times and to jectives did not provide operational criteria to guide the increase front-loading of fast-tracked operations. allocation of additional lending across countries and/or purposes. · Special-initiatives lending was the weakest part of the response. Special-initiatives lending was limited (often · The main component of the response--increased IBRD involving the relabeling of existing lending), while the lending--was relevant, and the target was achieved and appeal to donors through the Vulnerability Financing even exceeded, but compromises in quality are appar- Facility received a muted response, which reflected its ent in some operations. The Bank's response to the sharp limited preparation and inopportune timing--request- increase in demand was facilitated by the Bank's Crisis- ing funds when potential contributors were worried Response Working Group, which allowed key internal about domestic budgetary pressures. stakeholders, including the Regional vice-presidencies, OPCS, and the Country Credit Risk Department, in · The quality and continuity of engagement with a coun- consultation with senior management, to come together try was a critical factor in determining the readiness quickly on programs that could be supported by IBRD and relevance of the Bank's response. funding. Yet compromises are apparent in some opera- · Analytical work at the institutional level did not fea- tions, especially with respect to the gray area between ture among the objectives (or instruments) of the stat- providing financing to smooth consumption and invest- ed Bank response. Nevertheless, a considerable amount ment and to protect the vulnerable, and providing financ- of work was carried out by central units as well as by the ing as part of a liability-management operation. 46 | The World Bank Group's Response to the Global Economic Crisis Regions. For the Bank, this included contributions to crisis-response initiatives (such as the lending for infrastruc- global knowledge, such as DEC's analysis of the poverty ture) was investment lending with slow start-up implemen- impact of the crisis, and Regional initiatives such as Eu- tation and limited disbursements during the crisis period. rope and Central Asia's analysis of the effect of the crisis With capital constraints at the institutional level and expo- on pension systems and the Middle East and North Af- sure limits at the country level, the desirability of tying up rica's work on social safety nets. large volumes of resources in slow disbursement operations is questionable. · Analytical work at the country level played an important role, but there were gaps. In some countries (Indonesia, The IDA Fast-Track Initiative, although moderate in size, Mauritius, Mexico, and Ukraine), earlier analytical work was effective in addressing its intended objectives. The provided a platform for the World Bank response, in some IDA response to the crisis was limited by the level of IDA cases in conjunction with international support packages. resources available. The Fast-Track Initiative was relevant In a few other countries, the demands of increased lend- and addressed the timeliness of the IDA response within the ing crowded out new analytic work, while in still others overall financial limitations. Although the improvements in the availability of trust funds allowed continuation of the processing time and the number of operations involved were work, and even increased attention to crisis-related issues. modest, this initiative was well designed and useful. Where limited prior work was available, however, the The attempt to mobilize donor financing through a Vul- quality of lending suffered. nerability Fund did not get off the ground. At the March · Specific aspects of the crisis response (poverty orienta- 2009 G-20 meeting, when the Bank called for countries to tion, work on the financial sector, donor coordination) provide 0.7 percent of their stimulus packages to a Vulner- showed that lessons from previous crises (particularly ability Fund, the response was lukewarm at best. The Bank the East Asian crisis) were generally incorporated into subsequently changed course, and concentrated instead on the Bank Group response. These aspects are discussed the IDA16 replenishment, including pressing for the crisis- later in this chapter, based on the findings of a sample of response window proposed by some of the IDA deputies. country reviews. Crisis Response Initiatives The relevance of the Bank's crisis-response initiatives ap- pears to have been limited, though they did provide high- profile contexts for engaging sector staff, clients, and part- ners in the crisis response. Several of these initiatives were launched in response to previous crises--in food and fuel-- and were adapted as part of the response to the global eco- nomic crisis during late 2008 and 2009. Lending under the initiatives was closely associated with the overall lending in- crease, and it is difficult to ascertain their separate impact, ei- ther in aggregate or at the level of individual countries. In terms of increased lending, by far the largest of the Bank's crisis-response initiatives was the Infrastructure Recovery and Assets Platform (INFRA), but it was less effective in increasing disbursements than non­initiative- based lending. The bulk of the increase in IBRD disburse- ments came from DPOs, often related to the crisis response Photo courtesy of Scott Wallace/World Bank. in each country program. Most of the lending under the Assessment of the World Bank Group Response | 47 Country-Level Response particularly in Central and Eastern Europe, were experienc- ing severe external imbalances and asset bubbles. The three To examine how the Bank took account of differential countries in the sample with these problems were Georgia, country exposure to the crisis, IEG focused on a sample of 11 countries--7 IBRD-only, 2 IDA-only, and 2 IBRD-IDA Hungary, and Ukraine (although in Georgia's case, the prob- blend countries. The sample is not random. The country lem was largely associated with the military conflict in Au- selection reflects the evaluation team's interest in covering gust 2008). all six Bank Regions and countries experiencing a variety Vietnam is a partial exception. Although its economy was of crisis conditions. The findings below have been distilled overheated by end-2007 and had severe external imbalances, from IEG's country case­study analyses, which included ex- the decline in growth was moderate (from 8.5 percent in 2007 tensive interviews with country authorities, country teams, to 5.5 percent in 2009). The government had introduced a sta- and partners, in most cases in the context of country visits, bilization policy package by mid-2008 (and averted a financial and careful reading of the documentary evidence pertaining crisis at that time). By late 2008, when the global crisis reached to the operational relationship with the country. Vietnam, the government switched quickly to an expansion- Five of the 11 case study countries experienced severe ary stance. The stimulus package was phased out, starting crises, with negative GDP growth in 2009, and 2 others in late 2009. Rapid policy responses, together with continu- experienced moderate crises; the remaining 4 case study ing high support from the donor community, including in- countries were less affected, though they all faced crisis creases in financing from the Bank, the Asian Development risks. The Bank provided substantial financial assistance to Bank (ADB), and Japan, helped avoid a bigger slow-down in six case study countries, four (Colombia, Hungary, Mexico, growth. Vietnam's underlying external imbalances still pose and Ukraine) received substantial IMF crisis-related fi- some risks for the post-crisis period. nancial assistance, and one (Georgia) received a Stand-By Most of the countries entering the crisis with relatively Arrangement (see box 4.1). Four countries in the sample sound macroeconomic fundamentals suffered only moder- experienced moderate crisis impacts, with lower GDP ate or negligible impacts. This includes countries as diverse growth in 2009 than in previous years, but not substantially as Bangladesh, Indonesia, Mauritius, and Nigeria. The ma- so. For these countries, the Bank provided high levels of as- jor exception is Mexico, which entered the crisis with strong sistance in two cases and moderate levels in the other two. macroeconomic performance and policies but suffered a ma- The countries entering the crisis with macroeconomic im- jor recession as a result of the crisis. GDP declined by more balances suffered a severe setback. Although the majority than 7 percent in 2009, largely due to the country's proximity of developing countries had improved their macroeconomic to the United States and linkages with the U.S. economy. At performance substantially during the 2000s, some of them, the same time, Mexico's strong macroeconomic stance prior BOX 4.1 CASE STUDY COUNTRIES: CRISIS SEVERITY AND WORLD BANK AND IMF FINANCIAL SUPPORT The table below shows the countries in the sample, as well as the importance of Bank and Fund financial support and the severity of the crisis as indicated by GDP growth (or decline) in 2009. The sample includes countries that received very high levels of Bank assistance, as well as those receiving moderate or low levels of special assistance in response to the crisis. Some of the countries in the sample also received substantial IMF support, while others received little or none. Role of the World Bank and IMF in Response to the Crisis in Case-Study Countries IMF role Substantial Medium No IMF financing Bank role Substantial Mexico (MA) Georgia (MA) Indonesia (LA) Colombia (MA) Vietnam (ModA) Mauritius (LA) Medium Ukraine (MA) Jordan (ModA) Hungary (MA) Bangladesh (LA) Nigeria (LA) Source: IEG missions. Note: MA = most affected. ModA = moderately affected. LA = least affected. 48 | The World Bank Group's Response to the Global Economic Crisis to the crisis allowed it to receive the first IMF Flexible Credit packages had important signaling functions. That Indonesia Line (for $47 billion), while the reduction in Bank exposure had no obvious balance of payments disequilibrium and that during the previous decade (from $11 billion in 2000 to $4.7 the amounts needed were modest (compared with the IMF billion in 2007) allowed for a large increase in Bank lending. Mexico package and others) and for budget financing, the By end-2009, the Bank's exposure in Mexico had increased leadership of the Bank, and good cooperation with the ADB again, to some $10.4 billion (box 4.2). and Australia, made this program a major success (box 4.3). The relevance and quality of the response varied across The Bank's initial crisis response was quick in a number countries. Relevance and quality were high in Georgia, In- of cases, reflecting specific country conditions and/or donesia, and Mexico and low in Hungary; the majority of government initiatives. In Georgia, for example, where the the countries fell between these extremes. Although many Bank was engaged in a more traditional post-conflict crisis factors were responsible for the differences, the quality of the response, the IMF approved a Stand-by Arrangement dur- Bank's prior engagement with the country in question ap- ing the same period. This allowed a swift reaction when the pears to have been the main determining factor. global economic crisis hit, as discussed in box 4.6. The gov- ernment of Indonesia also reacted early, requesting that the The Bank's contributions in Indonesia and Mexico were Bank prepare and lead a multi-donor contingency financing. significant. Although apparently at the two extremes of the The government announcement of the support in December range (Indonesia barely experienced a crisis when measured 2008 helped bolster market confidence in the country. by GDP growth), and subject to different Bank and IMF re- sponses, there are two major underlying similarities. First, Outside the set of country studies, the Bank also responded the two countries had strong fiscal and external sector bal- in a similar timeframe when the government of India an- ances at the outset of the crisis. Second, both countries had nounced its crisis-response strategy, which included a re- reduced Bank exposure by about half in the previous decade. quest for Bank support through a DPO in the financial sec- As a result, the Bank and the respective regional banks were tor and a number of investment operations in the financial able to provide needed budget financing. sector, infrastructure, and energy (box 4.4). The large contingency financing provided by the IMF in Mexi- Continuing Bank involvement, active policy dialogue, co, and by the Bank, with the ADB and Australia, in Indonesia and good analytical work were important prerequisites (through a DPL-DDO) boosted market confidence. Neither to quick and effective reaction in the crisis. This applied of the contingent financing packages was disbursed, attesting to well-performing countries, such as Colombia, Indonesia, to the underlying strengths of the country situations. Yet both BOX 4.2 MEXICO: A SUBSTANTIAL CRISIS RESPONSE The Mexican economy was hit particularly hard by the global crisis, in spite of good macroeconomic policies and strong fiscal and external accounts positions at its outset. This was largely a result of the integration of the Mexican economy with the U.S. economy and financial sector. GDP growth slowed from 3.3 percent in 2007 to 1.3 percent in 2008, and became a negative 6.6 percent in 2009. Manufacturing output dropped by 20 percent in the first quarter of 2009, and exports declined by 22 percent. Mexico received substantial external support, including a contingent $30 billion swap line from the U.S. Federal Reserve and the $47 billion provided by the IMF Flexible Credit Line in April 2008. The government also sought support from multilateral banks, including the World Bank, to help finance a fiscal stimulus package, which increased the deficit by 3 percent of GDP in 2009. The Bank's response was quick and substantial. Although the pre-crisis Country Partnership Strategy had envisaged an average of $800 million in annual commitments, the Bank committed loans totaling $9.4 billion during fiscal 2009­10. These operations supported the authorities' programs in social protection and housing for the poor, fiscal reform, energy, and the environment. The ability of the Bank to prepare and approve a large program of operations during the crisis was enhanced by the countercyclical reduction in Mexico's outstanding debt to the Bank, which had declined from about $9 billion in 2004 to less than $5 billion in 2007, and by the Bank's continuous engagement in AAA in the years before the crisis. Source: IEG mission findings. Assessment of the World Bank Group Response | 49 Mauritius, and Mexico, as well as to countries with poorer exception. Lending instruments were used in particularly policy performance, such as Ukraine. Before the crisis, only innovative ways (such as the DDO in Indonesia) and were Indonesia had used technical assistance from the Bank to able to support priority government programs (for example, set up an institutional framework for financial crisis man- for protecting vulnerable groups in Mexico and Vietnam) agement. Indonesia also used the Bank's crisis simulation or to advance the policy dialogue with the government (as models in December 2008. In the Ukraine case, Bank in Jordan, Mauritius, and Nigeria). The Bank's program in knowledge of the macroeconomic situation was useful in Georgia was able to combine the Bank's extensive experience shaping the IMF support program. But it took a long time in post-conflict reconstruction with the needs prompted by to prepare the financial sector DPL because of limited prior the global economic crisis (box 4.6). Bank lending to the financial sector. The substantial increase in lending in practically all pro- When the Bank's prior involvement was limited, it was grams had different impacts on policy dialogue and ana- difficult to react quickly and provide effective support. lytical work. Where analytical work was largely funded Hungary, which had graduated shortly before the crisis (and with the Bank budget, as in Ukraine, the trade-offs led to is a European Union member), is an example. An initial at- a decrease or a delay in analytical work that will need to be tempt to restart lending in mid-2008 failed, partly because addressed in coming years, lest it undermine future lending of "turf " issues among the Bank, EC, and IMF. The subse- quality. In Indonesia and Vietnam, however, the availability quent attempt, after the crisis brought all parties together of trust funds allowed analytical work to continue, or even in October 2008, took a long time, and a loan was finally increase, to cover the poverty impact of the crisis. approved when financing was no longer needed (box 4.5). Quality at Entry and Crisis Relevance of DPOs The design of the country response reflected appropri- A major element in assessing the Bank's crisis response ate use of different lending and nonlending instruments. is the quality at entry and crisis relevance of its DPO in- Hungary, for the reasons discussed earlier, was a possible terventions, given the prominence of such operations in BOX 4.3 INDONESIA: BANK SUPPORT THROUGH CONTINGENCY FINANCING The impact of the global crisis in Indonesia was very mild (growth remained high throughout the period, with a moderate decline in 2009; fiscal and external balances remained strong, and public debt continued to decline), but there was a short period of financial turmoil and anxiety in late 2008 that continued into early 2009. In late 2008 the government moved quickly to calm financial markets. This included financial policy measures in late 2008 and a request to the Bank and other partners for contingency financing to ensure financing of its 2009 budget. All of this was presented to investors as a complete crisis management plan. In early 2009, the government introduced a fiscal stimulus package, increasing the planned fiscal deficit from 1 percent to 2.5 percent of GDP (the actual deficit was 2.2). A major objective of the revised budget was to avoid repeating the experience of the 1998 East Asia crisis, when infrastructure spending fell drastically. The main component of the Bank response was the $2 billion DPL-deferred drawdown option (DDO), which was requested in early October 2008, as part of a possible multidonor package of contingency financing in support of the government's crisis- response program. The total contingent financing facility, cofinanced with the ADB, Australia, and Japan, amounted to $5.5 billion, which was estimated to be the minimum external financing required for the 2009 budget. The DDO also supported establishment of a crisis monitoring and response system to anticipate possible adverse social impacts. The total Bank lending program reached $4.3 billion in fiscal 2009. In addition to the DDO, the Bank approved two other development policy lending (DPL) operations, supplemental financing for two ongoing operations to support community- driven development programs, and an operation similar to a sectorwide approach (SWAp) in education. Two other DPLs were approved in the first half of fiscal 2010. As in Mexico, the increased lending was made possible by nearly a decade of negative net disbursements (exposure fell from nearly $12 billion in 2000 to about $6 billion by 2007). Net disbursements turned positive in fiscal 2009 and continued to grow in the first half of fiscal 2010. In spite of this, and because good market response did not require the DDO to be disbursed, total Bank exposure to Indonesia, as of December 2009, was still lower than it had been at the end of fiscal 2003. Source: IEG mission findings. 50 | The World Bank Group's Response to the Global Economic Crisis BOX 4.4 INDIA: COMPREHENSIVE CRISIS RESPONSE For India, the global economic crisis triggered a chain of adverse events, starting with a slowdown in India's exports, which spread to production and investment when capital flows started retreating from emerging markets and stock market valuations began a rapid decline, consistent with global trends. Growth slowed down across all sectors, with the overall growth rate falling from a peak of 9.7 percent in 2006­07 to 6.7 percent in 2008­09. The macro-policy response of the authorities was timely and broad-based, including increases in rupee and foreign exchange liquidity, fiscal stimulus, and actions on trade and finance. Reflecting the slowdown in economic activity and the consequent lower revenue receipts and countercyclical policies, the general government fiscal deficit deteriorated in fiscal 2008­09--reaching 9.6 percent of GDP compared with budget estimates of 5.1 percent. With the recovery from the slowdown well under way, the budget for fiscal 2010­11 cautiously rolled back some of the stimulus measures adopted in the second half of fiscal 2008­09. Against this background of crisis and response, the Bank adapted its fiscal 2009­12 country strategy, which focused on inclusive growth, infrastructure, and the effectiveness of service delivery. In so doing, it intensified its program delivery, employing both IBRD and IDA resources, and India became the largest single borrower from both the IBRD and IDA in fiscal 2010. In total, the Bank committed $11.5 billion to India in fiscal 2009­10 and disbursed $6.8 billion--almost double the respective amounts for fiscal 2007­08. In response to a specific request from the government, the Bank earmarked $3 billion to support India's domestic response to the global economic crisis, including a $2 billion financial sector DPO. This operation focused on supporting the injection of capital into the public-sector banks so they could maintain the growth in credit to priority sectors rather than focusing on stringent policy-based conditionality. The Bank's crisis response also included support for infrastructure finance, small and medium enterprises, and rural banking, as well as extensive AAA support through both formal reports on poverty, growth, and other topics and more informal policy notes that provided a basis for timely engagement with the authorities. Source: IEG. the response. The evaluation examined the Bank's dialogue sector and insufficient coverage of Financial Sector Assess- and lending support through DPOs, in the context of its 11 ment Programs and other diagnostic and analytic work-- case study countries plus 6 other countries that were major followed by infrastructure. Economic policy was both the users of DPOs over the period--Brazil, India, Kazakhstan, most highly represented sector by value and number of Peru, Poland, and Turkey. Together these 17 countries ac- operations and had the most consistently acceptable lev- counted for $28 billion in 46 DPOs--or 68 percent of total els of quality. Thus, while there are positive indicators of Bank (IBRD and IDA) DPO commitments--approved dur- quality at entry, there are serious concerns in certain ar- ing the fiscal 2009­10 period. The results of the analysis are eas, especially the financial sector, as well as with regard summarized in table 4.1. to results and their sustainability. Results frameworks are works in progress in many DPOs and need to be strength- The evaluation used common criteria across the countries ened to enhance prospects for sustainability, particularly for an initial review of quality at entry, using Bank policy since external conditions remain volatile. as set out in Operational Policy 8.60: Development Policy Lending, and as amplified in the Bank's good practice guid- The Bank's response in almost all of the 17 large DPO-using ance to staff. The evaluation's analysis stops short of a full countries had an element of crisis-response relevance, though quality-at-entry assessment, but it does pay particular atten- with considerable variation across countries and differences tion to the results frameworks of the 46 operations as critical in impacts. Hungary, Mexico, and Ukraine, the hardest hit indicators of operational quality. of the countries, all had large IMF programs, though Mexico did not draw from the Fund. For Hungary and Ukraine, the The quality-at-entry ratings on the 46 DPOs vary from Bank supported policy measures designed to relieve some of unsatisfactory for the $2 billion India financial sector the problems that had aggravated the crisis, and in the case of operation to highly satisfactory for the $2 billion Indo- Hungary, carried out a Public Expenditure Review under the nesia DDO and two environment DPOs in Peru, with DPO, designed to help the authorities improve public expendi- other operations falling in between. By sector, financial ture allocations. Mexico, by contrast, faced an imported rather sector operations were the weakest of the reviewed opera- than a homegrown crisis, and the Bank helped the government tions--reflecting the decapitalization of Bank skills in the Assessment of the World Bank Group Response | 51 BOX 4.5 HUNGARY: DELAYED ATTEMPT TO SUPPORT A GRADUATED COUNTRY The effects of the crisis were felt early in Hungary, which was in full crisis mode by mid-October 2008. Financial liquidity was restored by a large IMF-led rescue package of about 20 billion (15 billion from the IMF, about 4 billion from the EC, and 1 billion planned from the Bank). Discussions of possible Bank assistance to Hungary had started in April 2008, even though the country had graduated from the IBRD in 2007. Project documents for the proposed single-tranche DPO of 500 million stated that the project was not to be seen as crisis assistance and that, if Hungary were in a crisis, the EC or the IMF would have primary responsibility to offer stabilization assistance. However, in the subsequent process, concerns on the part of the Bank's senior management (and some shareholders), the IMF, and the EC and reduced interest on the part of the authorities led to the abandonment of the operation in June, after the government launched a successful bond issue of 1.5 billion. But when the crisis hit, all parties came together under the IMF-led rescue package. The Bank's initial objective for the proposed DPO had been to support key reforms in the social sectors and labor markets, but during preparation, the focus quickly shifted to emphasize financial sector issues. This time, discussions within the Bank and with the government were protracted, with much of the debate focused on the terms and conditions of the proposed loan. The Operations Committee package (in February 2009) proposed a loan maturity of five to seven years, with a front-end fee of 1 percent and a 2 percent fixed spread over LIBOR. But the government contin- ued to seek better terms, and preparation stalled. In April 2009, the new government decided to continue discussions on the Bank loan, including discussion of the terms and conditions, but asked for a rationale for the terms being offered. Board approval (September 2009) took place at a time when the earlier liquidity concerns had all but been resolved. Hungary had returned to the market in July 2009 with a successful bond issue, and the IMF (and EC) had disbursed their third tranches (subsequently the IMF disbursed its fourth tranche). The need for the Bank loan no longer appeared compelling, and at end- fiscal 2010 the loan had not been signed. Because Hungary was the first case of lending to a graduated country on special terms during this financial crisis, it faced unusual circumstances. First, the decision of whether the Bank should lend to an IBRD graduate delayed Bank participation in the earliest stages of the preparation of the Hungary program. Second, the special pricing that the Bank proposed raised problems for the Hungarian government that led to the delay in Board presentation and approval. Once the general approach to such lending was resolved, the Bank was able to move ahead more quickly in specific country situations, as it did in Latvia. On the same day the Board approved the DPO for Hungary, it approved a financial sector DPO for Latvia, another graduated client, under very similar conditions. That loan was signed two days later and is fully disbursed. Source: IEG mission findings. to fund social safety nets and other countercyclical programs. growth prospects were undermined by the global and re- For Poland and Turkey, the Bank supported the authorities' ef- gional slowdown. forts to restore fiscal sustainability and growth, in part through Attention was given to fiscal and debt sustainability in the social safety net reforms, with strong Bank engagement in DPOs, as required, but more attention should have been public expenditure review processes. paid to the broader macroeconomic and political-econo- For Colombia, Indonesia, Mauritius, and Peru, Bank en- my risks of the budgetary corrections likely to be needed gagement included support through a DDO, reflecting in the future. Where initial country conditions were poor in part the countries' interest in insuring against a larger and the crisis had a substantial negative impact, thus raising crisis impact and in signaling their preparedness to the more serious questions regarding fiscal and external balanc- markets. In Brazil, the crisis caused several additional states es, the country also had an IMF program that focused more to step forward for Bank support to smooth expenditures in directly on macroeconomic performance and sustainability. the face of reduced revenues. In India and Nigeria, the Bank Vietnam was an exception--although it had substantial fis- focused on the financial sector to improve the resilience of cal and external imbalances, it did not have an IMF program. those economies in the face of shocks. The Bank's engage- In this case, the Bank and the Fund provided joint informal ment in Bangladesh was mostly about the food crisis, and advice, although the Bank was more willing to accommodate in Georgia it was focused on post-conflict assistance, where the government's tilt toward growth. 52 | The World Bank Group's Response to the Global Economic Crisis BOX 4.6 GEORGIA: BANK READINESS AND LEADERSHIP IN A POSTCONFLICT SITUATION Georgia's economic growth before the crisis was high, at about 9 percent per year since 2003 (and 12.4 percent in 2007). With increased growth came overheating, including a large current account deficit (20 percent of GDP in 2007 and 26 percent in the first half of 2008). In early August 2008, the tensions between Georgia and the Russian Federation escalated into a full-blown military conflict. Although hostilities lasted only about a week, infrastructure losses were great, and the conflict led to a large number of internally displaced people. In the aftermath of the conflict, and in the context of the global economic crisis, GDP fell by 4 percent in 2009, and the fiscal deficit approached 10 percent of GDP. International support following the August war was swift and substantial. On August 22, the Bank sent a mission to Georgia. On September 3, the IMF announced agreement on a $750 million Stand-by Arrangement. In September, the Bank, together with the UN, led a joint needs assessment mission that included the ADB, EBRD, EIB, and EC. A donors' meeting in October, co- chaired by the EC and the Bank, resulted in pledges of $4.5 billion, exceeding the financial needs estimated by the assessment. The Bank played a large and constructive role in the international response to Georgia's twin crises. The large volume of the Bank's financial assistance ($460 million in commitments) was well planned and implemented, in part due to Georgia's progression from IDA-only to blend country status in fiscal 2009 and the country's good policy reform and project implementation record. But the Bank's role went well beyond lending, as evidenced by its leadership of the joint needs assessment and organization of the donors' meeting. The Bank's internal organization and expertise and its time-tested convening power in leading multi-donor missions to assess reconstruction needs was exactly what was needed in Georgia after August 2008. Source: IEG mission findings. Poverty Focus poverty impact of the crisis and measures to alleviate the Attention to poverty issues was greater than in previous social costs. crises, but with important gaps in central guidance and Bank objectives and actions related to maintaining public frequency of monitoring. The IEG review of lessons from investment in infrastructure were accompanied, in some previous crises emphasized the importance of identifying cases, by the explicit objective of supporting employment the poverty and social impacts of a crisis and responding (through labor-intensive infrastructure) and other social with policy measures and support to address these impacts. objectives. For example, in Georgia, an IDA credit for the This evaluation found that poverty and social impacts gen- Regional and Municipal Infrastructure Development Proj- erally received adequate attention through lending and ana- ect, processed on an accelerated schedule, had the objective lytic work, though not in all countries. However, the overall of improving selected municipal infrastructure and service objectives of the Bank response were only vaguely defined, and assisting in restoring infrastructure and services and im- and limited guidance was provided to the Regions and coun- proving housing conditions of conflict-affected people. Also try teams. Monitoring of the social and poverty effects of in Georgia, the first IBRD loan was the provision of addi- the crisis might have been carried out on a more real time tional financing for the Secondary and Local Roads Project. basis. The evaluation also found that in many countries the The report noted that "The Government is therefore seeking governments were also aware of the issues and interested in urgent Bank support to scale up road rehabilitation activities addressing them. as a means to create temporary employment in road con- At the country level, there were appropriate differences, struction, provide long-term economic benefits and improve reflecting the initial levels of social expenditures and the local access through improved secondary and local road in- depth of the crisis. For example, in Hungary and Ukraine-- frastructure" (World Bank 2009c, p. 46). where the total amount of social expenditures (including Financial Sector Focus pensions) is a large share of the total government budget In several case study countries, the Bank supported re- and the crisis led to a substantial worsening of fiscal perfor- forms in the financial sector through a DPO as part of the mance--the concern was to improve targeting and reduce response to the crisis. This included countries such as Indo- overall expenditures (including pension reform). In Co- nesia and Nigeria, where there was no program involvement lombia, Indonesia, Mexico, and Vietnam, where total social with the IMF, and Hungary and Ukraine, where there was. expenditures and safety nets are still limited, the measures In most of the cases, Bank work on financial sector issues introduced during the crisis included assessments of the has been relevant for policy actions on banking supervision, Assessment of the World Bank Group Response | 53 TABLE 4.1 Selected Development Policy Operations Approved in Fiscal Years 2009­10 Country/ total DPOs (US$ millions)a Program content and conditionality DPO results framework Bangladesh Emergency food operation, expansion of social Adequate--built on survey capacity $130 safety net and food security Brazil Statewide fiscal and federal environmental Strong on state finances; weak realism on core environment $3,080 management issues Colombia Programs in environment, social protection, and Strong results frameworks $1,400 private sector development Georgia Emergency relief operation, fiscal policy, and social Adequate--based on Emergency Needs Assessment $125 safety net improvements Hungary Pension reform and strengthening of bank Adequate on pension reform and financial sector $1,413 supervision India Recapitalization of state banks and improved bank Weak on measurability and quantification of the outcome $2,000 supervision indicators Indonesia Public financial management and private Strong results frameworks, except two infrastructure DPOs $3,950 investment in infrastructure Jordan Tax base, social protection, public expenditures, Adequate--measureable outcomes and baselines $300 and financial sector Kazakhstan Public resource management and financial sector Adequate--baselines and measurable outcomes $1,000 Mauritius Structural reforms in public finance, trade competi- Adequate--but uses intermediate outputs as proxy for results $150 tiveness, investment climate, and social inclusion Mexico Environmental sustainability (energy, water, agricul- Strong results frameworks; weak on the environment (where $3,709 ture, and transport), countercyclical fiscal policies, attribution and causality between the actions supported and and measures to enhance medium-term fiscal results are weak) sustainability Nigeria Financial sector, public spending, and financial Adequate, but did not address impending bank crisis $500 management Peru Environment, fiscal sustainability, and social Strong results frameworks for environment and adequate $1,560 protection baselines and measurable outcomes for fiscal management Poland Public sector, labor reform, and fiscal sustainability Strong--clear overall program development objectives, $3,881 quantified baselines and targets Turkey Economic management, universal healthcare, Weak on energy efficiency; adequate on economic $2,600 investment climate, and energy efficiency management and social programs Ukraine Investment climate, public financial management, Adequate--baselines and measurable outcomes $900 and financial sector Vietnam Public investment reform (project selection, imple- Strong on macro; weak on power and education $1,000 mentation, financial management, and monitoring & evaluation) Total DPOs $28,015 Source: IEG. Note: Covers 68 percent of World Bank DPO commitments during fiscal 2009­10. Selected countries include 11 case study countries plus 6 large DPO users in fiscal 2009­10: Brazil, India, Kazakhstan, Peru, Poland, and Turkey. Of the 13 large IBRD borrowers discussed in the text, excludes Argentina and China, as they are not DPO users. While individual sectors were targeted, the DPOs had the broad goal of macroeconomic stabilization in the face of an actual or potential crisis. establishment and operating mechanisms of supervisory au- supported the government's Financial Sector Stability Fo- thorities, and stress tests of commercial banks. rum. The government program had become operational in 2008, setting up the rules and decision-making procedures In Indonesia, the Bank provided financial sector support that would apply in the event of a systemic bank crisis. The through programmatic DPOs. These operations built on DPL-DDO provided a team of experts to review the pro- Bank support for government efforts to prepare for a finan- tocols for each subsector and recommend improvements.1 cial sector crisis several years earlier. A DPL-DDO (pre- In addition, a crisis simulation exercise, supported by the pared in collaboration with the ADB, Australia, and Japan) Bank, took place in December 2008, when proactive gov- 54 | The World Bank Group's Response to the Global Economic Crisis AAA Macro underpinnings sustainability analysis Limited AAA except food price impact survey Weak on agricultural policies; adequate on macro and fiscal sustainability Extensive AAA on environment and state finances Adequate analysis on fiscal sustainability Extensive and programmatic AAA; Financial Sector Assessment Weak on fiscal sustainability; adequate on macro analysis Program Update (2005) Extensive AAA, including programmatic Public Expenditure Review Weak on fiscal sustainability; strong debt analysis Limited recent AAA, extensive on pension reform; Financial Sector Adequate analysis on fiscal sustainability Assessment Program Update (2005) Limited previous AAA in the financial sector; self-assessment Weak on fiscal sustainability; adequate macro analysis Financial Sector Assessment Program (2009) and extensive work by Reserve Bank of India Extensive AAA, including Public Expenditure Review Adequate macro and fiscal sustainability analysis Extensive AAA, including Public Expenditure Review, Investment Adequate on macro analysis and fiscal sustainability of social Climate Assessment, and Poverty Update programs Extensive AAA; Financial Sector Assessment Program Update (2008) Adequate macro and fiscal sustainability analysis Extensive AAA, including Country Economic Memorandum Adequate macro and fiscal sustainability analysis Extensive AAA and fee-based services; Financial Sector Assessment Strong analysis on macro and fiscal sustainability Program Update (2006) Extensive AAA, including Banking Sector Diagnostic and Public Adequate analysis on macro and fiscal sustainability Expenditure Management and Financial Accountability Extensive AAA, including Country Environmental Sustainability Adequate analysis on macro and fiscal sustainability Analysis and Public Expenditure Review Extensive AAA, including Public Expenditure Review Strong analysis on fiscal sustainability; priority spending Extensive AAA, including Country Economic Memorandum, Invest- Adequate analysis of debt and fiscal sustainability ment Climate Assessment, Labor Market Study, and Programmatic Public Expenditure Review Limited AAA on financial sector prior to Financial Sector Assessment Weak on fiscal sustainability; adequate macro analysis Program Update (2008); extensive AAA on macro and public finance Extensive AAA, including Public Expenditure Review; extensive work Weak on fiscal sustainability; strong macro analysis of partners ernment measures had already started to reduce the impact Nigeria, focused on several issues related to credit and port- of the crisis. folio quality and banking supervision and regulation. As the global crisis weakened oil prices and government revenues, In Nigeria, Bank support, also through a DPO, did not the authorities sought Bank assistance through a DPO, with address the ongoing deterioration of the banking sector. financial sector support as the main component. It focused The Bank had more limited operational engagement in the on the need to strengthen the supervision of banks, to in- financial sector in Nigeria than in Indonesia, although staff crease banks' capital, and to adopt the International Finan- had maintained an active dialogue with the Central Bank of cial Reporting Standard. Assessment of the World Bank Group Response | 55 There were long lags in providing financial support to the Adequacy of Instruments financial sector in some severely affected countries with Bank instruments for quick-disbursing lending had been large IMF-led response programs, such as Hungary and extensively modified prior to the crisis, with smaller Ukraine. In these countries, the Bank's work on the finan- modifications during 2008 and 2009, including an en- cial sector was closely linked to that of the IMF, including its hancement of the DDO, the introduction of a DDO for contributions of its prior knowledge of the financial sector catastrophic risk, and a modification of the Special Devel- (or early analytical work when prior knowledge was limited, opment Policy Loan. The Bank's decision not to undertake as in Hungary) to the IMF programs. The financial sector a more extensive revision of instruments during the crisis DPOs that were eventually prepared, however, were ap- reflected management's assessment that existing instruments proved nearly one year later, long after the crisis hit. There were adequate to support an enhanced and rapid response.2 were difficulties created by the two very different operational Several other international financial institutions intro- approaches followed by the Bank and the IMF: the IMF put duced new instruments during the crisis. For example, the forward Stand-by Arrangements that were subject to quar- IMF established a totally new instrument, the Flexible Credit terly reviews and conditions to be met every quarter, while Line, as well as enhancing the Stand-by Arrangements and the Bank was involved in preparing the overall policy matrix introducing other reforms in its lending framework (IMF that would be the basis for the operation months later. These 2009). Among the multilateral development banks, the ADB difficulties were surmounted effectively in Ukraine through introduced a Countercyclical Financing Facility with a short- good staff interactions at the personal level. In Hungary, at- ened maturity of five years and higher lending rates. The IDB tempts to overcome these difficulties were less successful, introduced a Liquidity Program for Growth Sustainability, and differences of view between the government and the also with five-year maturities. Bank led to protracted negotiations. Country teams used the available instruments in agile Finally, in the Europe and Central Asia countries, Re- and innovative ways, but there were some processing dif- gional initiatives--such as the Joint IFI Initiative and ficulties and delays. The instrument of choice in the Bank's the Vienna Initiative--facilitated the important contri- response to the crisis was the DPO, which was generally ef- butions of the (foreign) parent companies of domestic ficient in providing for rapid increases in loan sizes and dis- banks to the resolution of the potential systemic risks in bursement amounts. This allowed country teams, as in Tur- the financial sector, mainly through recapitalization. The key, to quickly adapt Bank programs to the rapidly evolving Bank played an important role in these initiatives, which country needs (box 4.7). were led by the European Union (EU) and other European But this instrument was not always amenable to a quick ap- organizations and by bilateral support from European gov- proval, and even when an ongoing DPO program was under ernments. way, it was difficult to switch to "crisis mode." Also, many DPOs needed to serve several conflicting objectives, includ- ing rapid response and provision of financing, as well as sup- porting reforms that had to be defined during preparation. This led to delays in the first Vietnam IBRD loan and in the Hungary operation (which was ultimately not signed). In Indonesia, the Bank used the DPL-DDO instrument as a contingent financing facility to address investor concerns. Although this was not exactly the purpose of the instrument,3 because Indonesia did not (and did not intend to) draw down the loan, the DPL-DDO achieved its objective of restoring in- vestor confidence in the market before it was even approved. In this case, the DPL-DDO operated in parallel with the IMF's Flexible Credit Line. The special features of the country situ- ation, however, make it unlikely that many other similar uses of the DDO instrument will occur in the future. Increases in the size of already-planned DPOs, particu- larly as part of a series of programmatic operations, were 56 | The World Bank Group's Response to the Global Economic Crisis BOX 4.7 TURKEY: ADAPTATION OF AN EXISTING PROGRAM In Turkey, the main impact of the global financial crisis and economic down-turn has been on the real economy: production and output, exports, and jobs. Before the crisis, Turkey had been on a path of robust, export- and private sector­led growth, building on 6.8 percent average annual GDP growth between 2002 and 2007. With the crisis, 2008 fourth-quarter growth plunged to ­6.5 percent, reducing the full-year GDP growth rate for 2008 to 0.7 percent. The economy continued to contract in the first three quarters of 2009, with GDP falling by 4.7 percent for the year as a whole. Estimated poverty impacts of the slowdown have also been significant: staff simulations point to an addition of 5 percentage points to the poverty rate, to bring it to about 22 percent. The government's response to the crisis included: (i) banking liquidity measures and monetary policy, (ii) fiscal stimulus, and (iii) employment and social measures. Turkish banks have remained highly capitalized and profitable. Fiscal stimulus measures were limited in cost and targeted key industrial sectors. With unemployment rising rapidly, the authorities introduced a number of measures to encourage hiring, preserve existing jobs, and expand active labor market programs. Bank support for the government's crisis response, which was built on a strong relationship, an ongoing Country Partnership Strategy, and an existing set of instruments, focused on scaling up DPL financing of operations in the pipeline, quick processing of additional financing on appropriate credit lines, gearing technical assistance toward the crisis dialogue, and supporting crisis-response measures by restructuring the DPL series accordingly. The Bank's ability to adapt its previously planned program to the government's crisis response built on a strong program of ESW and other AAA. Since the global economic crisis began, the Bank has launched several analyses of the economic and social impact of the crisis--with a particular focus on employment issues--and policies and programs to mitigate it, including two Country Economic Memoranda, an employment report, a labor tax study, a programmatic public expenditure and financial management review, and a study of the welfare impact of the economic slowdown and policy options for jobs. Commitments of Bank financial support totaled $5.1 billion in fiscal 2009­10, with disbursements of $4.7 billion. The Country Partnership Strategy was reviewed with the government and endorsed by the Board in January 2010, when it was agreed that the program for the next three years would focus on areas critical for renewed growth and job creation, sustainable energy and infrastructure, and human capital and social protection of the most vulnerable groups. Source: IEG. useful but had also costs. In Ukraine (DPL III), accelera- and results ratings, and the evidence suggests that they tion and increase in the size of the operation were accom- all do, but further analysis is required. panied by dropping or postponing some expected reforms · Fast-disbursing investment operations (SWAp-type op- (procurement law, improved targeting of safety nets), while erations) in countries such as Indonesia, Mexico, and in Vietnam (PRSC 8), the increase in size caused concerns Vietnam, where the Bank and other donors could pro- among cofinanciers. vide funding for ongoing government programs, were For investment lending, major findings from the review useful instruments in the crisis response. These opera- of the use of instruments in the crisis response include the tions have now taken on large proportions and, in prac- following: tice, differ little from DPOs, but have fewer strictures. · Additional (supplemental) financing for ongoing opera- · Traditional investment operations, mainly in infrastruc- tions, both DPLs and (especially) investment operations, ture, and some very large in size, helped increase the were useful instruments and were widely used across overall volume of lending commitments, but they con- the countries in the sample. Overall, 24 percent of all tributed little by way of disbursements and provision operations in fiscal 2009­10 were additional finance op- of liquidity during the crisis. While regular investment erations, almost all of them investment operations. This operations will continue to be approved during a crisis trend toward heavy reliance on supplements has accel- episode (particularly in countries not severely affected by erated in recent years, and for IDA, such operations ac- the crisis), they raise the question of the appropriateness counted for almost one-third of the value of credits ap- of tying up large volumes of Bank financial resources for proved in fiscal 2010. To qualify for additional financing, a long period of time with limited impact on the imme- a project must have satisfactory implementation status diate crisis years. Assessment of the World Bank Group Response | 57 Finally, an important finding relates to the cyclicality (or eration with the IMF in a variety of country circumstances countercyclicality) of lending and the need for "lending (and irrespective of whether the IMF had a program in headroom" at the country level in crisis periods. At the the country) are among the most positive findings of this country level, the countries that reduced their Bank expo- evaluation. Coordination with external partners was helpful sure substantially during the boom years of the early 2000s at the country level in many cases where the Bank Group (Indonesia; Mexico; and, to some extent, Colombia) were joined with others in international support packages. This in a better position to borrow large amounts from the Bank was especially true for coordination with the other multilat- in 2009 and 2010. Countries that had continued to increase eral development banks, including the AfDB in Mauritius; their exposure even when private capital inflows were very the ADB in Indonesia and Vietnam; the EBRD in Georgia, high, such as Ukraine, faced constraints tied to total Bank Hungary, and Ukraine; and the IADB in Colombia and Mex- exposure when the crisis hit. ico. Cofinancing with bilateral donors was also important in many countries, including the European Communities in At the institutional level, the same finding implies that Eastern Europe and Central Asia, and Japan, Australia and shorter-maturity loans would facilitate the Bank's man- many other bilaterals in East Asia. agement of country exposures and resources in a counter- cyclical manner. Although the East Asian crisis showed that Cooperation with the IMF was generally good, despite dif- demand for Bank lending may drop off quickly and substan- ferences in point of view in some areas and in some country tially after a crisis, one legacy of the long maturities of the situations. In a number of cases, the Bank's previous analytic Bank's crisis response lending is that exposures will be tied work provided a useful roadmap for the policy dialogue for up for long periods, constraining the Bank's capacity to re- Bank and Fund programs, as in Ukraine. And in Colombia, spond to new, unanticipated shocks--the recent agreement given the Bank's major support and the IMF's Flexible Credit on the capital increase notwithstanding. One possible source Line, the collaboration was timely and coherent. But in other of relief is that some countries may again voluntarily prepay cases, different policy views created tensions, though they loans. An institutional solution would include new instru- were ultimately resolved, such as the macro-policy stance ments, possibly along the lines of the countercyclical instru- (and interest rate subsidies) in Vietnam or the severity of ments with five-year maturities adopted by the ADB and the financial risks in commercial banks in Hungary, where the Inter-American Development Bank (IADB). overlapping work of the Bank and the IMF on financial sec- tor issues was but one of many sources of friction. Coordination with Partners Coordination with other donors, including the IMF, was Early Outcomes generally good, and was much better than in previous It is difficult at this stage to identify the impacts of the crisis episodes. This finding emerges from practically all Bank's response. First, the crisis and the crisis response are country studies and represents a major improvement over still evolving. As of the end of fiscal 2010, the perceived risks previous crises. It seems to be the result of the Bank, as well of a double-dip scenario, precipitated by contagion from fis- as most other organizations, realizing that the global nature cal and debt problems in Greece and other Euro-area coun- and depth of the crisis required coordinated efforts, and that tries, have increased. Second, the Bank's initial response to they were all in it together. A notable example of this atti- the crisis focused narrowly on increasing lending, and when tude is the Hungary case. In the spring of 2008, the Hungar- the Bank did formalize its strategy, it did not set out baselines, ian government requested, and the Bank originally agreed benchmarks, or intended results against which implementa- to prepare, a DPO operation. Opposition from the IMF and tion of the strategy could be evaluated. Nor did it provide the EU, which saw the Bank as "poaching" in their terri- guidance for country teams for implementing the strategy. tories, led to endless discussions and abandonment of the Third, most of the Bank's operations in responding to the proposed operation in the summer of 2008. Yet within days crisis are still under implementation and have not yet closed. of the IMF announcement (in mid-October) that important These important caveats notwithstanding, several observa- rescue packages were needed in several countries, including tions about early impacts warrant consideration. Hungary, discussions started on a multi-donor package with First, the Bank, working with partners, contributed to con- participation of the IMF, the Bank, and the European institu- fidence-building and macroeconomic stability. The evidence tions. 4 suggests that the Bank Group, together with others in the in- Regional initiatives (such as the Joint IFI Initiative), clos- ternational financial community, responded to the crisis and er coordination and frequent cofinancing with regional sharply boosted assistance to developing countries to help development banks and bilateral donors, and good coop- restore calm to the financial markets to limit contraction 58 | The World Bank Group's Response to the Global Economic Crisis and contagion. As stresses in financial markets eased over with stimulus packages designed to cushion the impact of the the course of 2009­10, developing countries largely regained recession. In view of the economic uncertainties and risks, access, and many are on the path to recovery. timely fiscal consolidation will be critical for macroeconomic stability, and thus for results and their sustainability. These results were achieved because of the policy efforts of the countries themselves, with IFI support playing an important Third, the Bank's disbursement of financial resources helped though secondary role. For example, the government of Indo- the authorities of affected countries to maintain important nesia's program was able to gain market support with a very public spending programs (especially for social protection) small contingency financing package led by the Bank, with as revenues declined and to increase other social programs participation of the ADB, Australia, and Japan. In other cases as economic activity declined. Of course, in enumerating the partners had the lead. In Ukraine, for example, the initial IFI impacts of Bank disbursements, it is necessary to take into ac- crisis-response package drew substantially on the analytical count the additionality of the Bank's response, and in particu- work of the Bank, which also provided about $1 billion in lar to differentiate Bank portfolio disbursements that would gross disbursements in the context of a much larger IMF-led have taken place without the crisis and the disbursements of package. And in Mexico, the ability of the Bank to prepare a incremental commitments, which is a much smaller number-- program of quick-disbursing operations rapidly--supported for example, 43 percent of fiscal 2009­10 disbursements were by very large contingency credit lines from the U.S. Federal for operations approved before fiscal 2009 (see box 3.2). These Reserve and the Fund--helped the authorities to maintain incremental crisis-response disbursements were concentrated macroeconomic stability and confidence in their program. in IBRD DPOs for Colombia, India, Indonesia, Mexico, Po- land, and Turkey and IDA DPOs for Nigeria, Pakistan, and Second, the Bank supported authorities' efforts to work Vietnam and emergency operations in Ethiopia--although to through the sequencing of the fiscal and debt sustain- a much more limited extent, in line with IDA's smaller crisis ability policies. DPOs and their supporting analytic work-- response. especially Public Expenditure Reviews in countries such as Hungary, Indonesia, Mexico, Peru, Poland, Turkey, and While it is too early to put a value on these impacts, the eval- Vietnam--and the associated policy dialogue have empha- uation and evidence from past crises suggest that such con- sized the importance of taking action against fiscal and debt tributions can be important. Examples include the Families vulnerabilities. But the effectiveness of this support remains in Action Program in Colombia, which expanded assistance unclear, and many risks remain, in many cases related to the to approximately 2.7 million families through conditional underlying domestic political economy of the necessary ra- cash transfers; the Oportunidades program in Mexico, where tionalization of social security, pension, and health system the Bank supported the national conditional cash transfer benefits. program that helps 5.8 million of the country's most vulner- able families; the Bangladesh conditional cash transfer pro- The Bank also supported policy and institutional reforms gram, which helps mitigate the impact of high food prices in public financial management during the crisis period to on the poor; and the Ethiopia program for chronically food- make the budget more transparent, predictable over the me- insecure households in rural areas, amounting to about 40 dium-term, and performance-oriented in Mexico, Poland, percent of annual food needs, which a recent impact evalu- and Vietnam. In Mexico, the DPO supported the adoption ation concluded is smoothing household consumption and of measures to enhance medium-term fiscal sustainability, protecting assets, even during times of crisis. including tax and tariff reforms to increase non-oil revenues and improve public expenditure management. In Poland, Fourth, early indications based on quality-at-entry consid- the government carried out a major tax reform linked to the erations raise questions about likely results, and in some Bank DPO, reducing taxes on labor incomes and simplify- cases point to major risks, for Bank-supported financial ing the personal income tax. In Vietnam, the government sector reforms. DPOs (or DPO components) in Colom- has begun strengthening the public investment project cycle, bia, Hungary, and Ukraine had strong reform content and including project selection, implementation, financial man- results frameworks and were well-designed to enhance the agement, and oversight. legal and regulatory framework to make the banking system more resilient in the face of future crises. The case studies The Bank will need to continue to invest in analytic work suggest that these operations have helped to create transpar- and policy advice for medium-term fiscal sustainability. ent processes for bank recapitalization with private funding, Fiscal performance during the crisis (particularly in 2009) or, where that was not possible, with public resources at the deteriorated across the board. This was an inevitable result lowest possible cost. In other cases, the Nigeria financial of the crisis, reflecting declines in public revenues coupled Assessment of the World Bank Group Response | 59 sector DPO focused more narrowly on international finan- to leverage IFC's role and capital. The initiatives initially had cial reporting standards and risk-based supervision when positive signaling effects on market psychology, in contribut- the country's financial system was under serious threat of a ing to the perception of a vigorous global response to the cri- financial crisis. And in India, the financial sector DPO fo- sis. However, IFC's catalytic role and additionality have been cused on funding the recapitalization of public banks in the less than expected, since most initiatives were not "ready context of a stimulus package that included only incremental for use" and IFC ultimately prioritized portfolio protection financial sector reforms. over pursuit of new business, as in most past crises. IFC was relatively risk-averse in its core business response, with the There are also several worrying developments on the invest- exception of its efforts in Sub-Saharan Africa. ment lending side--in the context of financial intermedia- tion loans and the handling of foreign exchange risks--that Preparedness and Readiness warrant further examination going forward. For example, IFC had anticipated some degree of financial turmoil and the Bank provided loans to Turkey in fiscal 2008, 2009, and moved quickly to place a strong and effective focus on the 2010 for SME operations as part of its crisis-response pro- financial health of its loan portfolio. In the early part of gram. The subsidiary loans are denominated exclusively in fiscal 2009, significant numbers of investment staff were re- foreign currencies, thereby increasing the SMEs' foreign ex- allocated from new business to portfolio management. Un- change rate risk and exposure, which had already become precedented stress testing was carried out by portfolio teams a source of instability in the past few years. In Mexico, the in all Regions, based on early experience in Europe and Cen- Bank provided a $1 billion quick-disbursing private hous- tral Asia. The relatively low level of nonperforming loans ing finance loan aimed at restructuring the short-term debt that IFC has maintained since the crisis began (4.5 percent of Sociedad Hipotecaria Federal for continuation of lend- as of June 2010, compared with over 11 percent following ing to low-income groups. However, these loans repeat the the crises of the late 1990s) is testimony to the effectiveness problems of past financial sector loans, as highlighted in of these determined efforts to supervise portfolio loans and previous IEG evaluations of financial sector operations. to resolve any repayment issues quickly. In Nigeria, the stress Finally, the Bank provided considerable support for pub- testing had the beneficial effect of allowing IFC to reduce its lic investment programs in infrastructure, but there is exposure in some client banks in advance of the country's limited evidence of impact at this stage, as reflected inter financial crisis several months later. IFC ultimately did not alia by the low disbursement rate on commitments ap- incur any losses, which validated this approach from a finan- proved during fiscal 2009­10. As noted in chapter 3, infra- cial perspective. structure had the largest increase in commitment volume in But on the equity side, IFC was less prepared. IFC's balance fiscal 2009­10, driven by large investment loans to India, Ka- sheet contained substantial unrealized equity gains when the zakhstan, and Ukraine for roads, as well as to Egypt, India, crisis hit, triple the size of realized gains. Given substantial and South Africa, with much of the increase concentrated write-downs due to the crisis,5 IFC may in hindsight have in the fourth quarter of fiscal 2010. However, these opera- divested more equity during the years of economic expan- tions--whether approved in fiscal 2009 or 2010--have dis- sion.6 bursed very little, so any crisis-mitigating impact that might While IFC's capital position was impaired by the crisis, it be derived from the associated Bank-supported investment was still strong enough for a moderate countercyclical re- program has been minimal to date. The Bank has also pro- sponse overall--but this did not materialize. In addition, to vided DPO support to the sector for two operations in Indo- effect major equity write-downs, IFC's balance sheet had to nesia, and their results frameworks were rated as moderately absorb significant grants to IDA ($1.75 billion between fiscal unsatisfactory by the evaluation team, compared with the 2008 and 2010). Nonetheless, IFC's estimate that it could in- satisfactory and highly satisfactory ratings for all other In- vest around 5 percent more annually in fiscal 2009­11 than donesia DPOs. in 2008 was conservative, given third-party assessments at Assessment of the IFC Response the time that IFC was well capitalized and past experience showing the financial benefit of IFC investing during a crisis. IFC's response was relevant in the needs it sought to ad- Yet the response was procyclical; that is, in line with the pat- dress and in seeking to leverage partnerships. But deliv- tern of private capital flows overall. ery has not matched intentions. IFC's response focused on relevant areas (trade, microfinance, bank capitalization, dis- Since most of the crisis initiatives required the creation tressed assets, and infrastructure) and appropriately sought of new platforms and funds mobilization, readiness to respond quickly to the crisis was inherently constrained. 60 | The World Bank Group's Response to the Global Economic Crisis Extra financing through the GTFP was possible right away, the impact of the crisis on their balance sheets. with an increase in the program ceiling, which required lim- · Distressed assets: The size of the distressed assets market ited additional capital allocation. Otherwise, the initiatives in developing countries was expected to grow from $1.5 could not contribute to the response until new structures trillion to $2.5­3 trillion as a result of the crisis. had been established and funds had been raised. Some 21 months after the start of the crisis, at the end of June 2010, From a supply perspective, the initiatives were structured only one-third of the targeted funds for the initiatives had in a way that generally fit with IFC additionality and ex- been mobilized (or one-sixth, if IFC's own contributions to perience and reflected some learning from past crises. The the initiatives are excluded), and only $1.9 billion had been initiatives tapped into IFC's global reach, deep knowledge of disbursed, most of it through the GTLP. certain sectors (trade finance, microfinance, infrastructure), and ability to offer a package of investment and advisory ser- New legal structures have taken time to emerge, especially vices. The design of the initiatives also exhibited some learn- for the IFC Capitalization Fund and the Infrastructure ing from past crises: the initiatives were targeted and phased Crisis Facility. The GTLP was the exception, with the quick (to address different stages of the crisis), some had expira- creation of a trust fund for the investment platform--a first tion dates, they were based on leveraging partnerships (cru- for IFC. This allowed other funders to contribute to the cial, given the scale of the identified private sector financing GTLP on commercial terms and minimize their administra- needs, which IFC alone could only go a small way to meet- tive burden. The GTLP also involved a structural character- ing), and this time involved IFC advisory services. istic that would enhance speed and volume: wholesaling of large-scale financing through a few institutions in a hand- However, the initiatives generally were not constituted ful of deals, as opposed to smaller project support through in a way that would allow for quick execution, so their many entities, as with other initiatives. relevance as crisis-response tools was limited. The initia- tives were novel and may provide opportunities for IFC to Relevance of Response broaden its impact in the long run--for example, allowing it IFC's new global initiatives have been focused on widely to draw on a wider range of funding sources than it has been recognized crisis vulnerabilities: global trade, microfi- able to do in the past (such as governments, pension funds, nance, infrastructure development, bank capitalization, and other development finance institutions) and to avoid and nonperforming assets. Taken together, these vulner- country and sector headroom constraints that may arise on abilities represented estimated private sector financing needs IFC's own account. However, in the context of the current in developing countries of more than $1.3 trillion: crisis, the initiatives had an inherent design flaw: most of · Trade finance (gap): Not only was access to trade fi- them required new, sometimes complex, arrangements that nance reduced (by an estimated $100­300 billion), but would take time to establish. IFC also lacked experience in where it was available during the first year of the crisis some areas, such as fund management and handling donor it tended to be at higher prices (double or triple in some funds (on the investment side). markets), and sometimes at shorter tenors. The creation IFC's crisis response differentiated among varying Region- of the GTLP turned out to be particularly appropriate, al needs. Most Regional strategy notes of late 2008 reflected since emerging-market banks ultimately ran into liquidi- nuances in initial conditions and how the crisis would affect ty constraints more than risk-exposure issues (addressed each Region: supporting trade finance in Africa, anticipat- by the GTFP). ing second-order transmissions of tightened credit (as op- · Microfinance: Loan refinancing requirements were ex- posed to first-order financial system problems); in East Asia pected to amount to $1.8 billion in 2009, as short-tenor and the Pacific, focusing on domestic market development loans that investors had provided to microfinance insti- through infrastructure, agribusiness, and nonperforming tutions before the crisis expired or loan prices were hiked loan platforms, to help substitute for export market demand, (Littlefield and Kneiding 2009). alongside trade finance and possible bank recapitalization; a strong financial sector focus in Europe and Central Asia, · Infrastructure: About $185 billion was needed in the based on provision of banking sector liquidity and capitaliza- sector, made up of rollover financing ($70 billion), re- tion, together with help on nonperforming assets; and sup- capitalization ($3.5­7 billion), and new project financing port for trade finance in Latin America and the Caribbean, ($110 billion). particularly to support agribusiness and commodities trade. · Bank capitalization: Emerging-market banks would The Middle East and North Africa was the exception. Here need at least $30 billion in equity support as a result of the approach was more a continuation of existing business Assessment of the World Bank Group Response | 61 rather than a crisis response, with continued efforts to tackle Implementation of Core Business Response long-term Regional concerns, such as infrastructure devel- Overall, the drop in new business in the first year of the opment, access to finance, and South-South investments. crisis was less than the 40 percent fall in past crises (IEG 2008a), but it was still significant. A pattern of risk avoid- However, IFC did not align its response well with specific ance, reflected in investment growth in countries where risk country needs. In Mexico, the corporate focus on portfolio conditions improved, and generally weaker levels of invest- protection and high selectivity in new investments, together ment in countries where risk grew, was apparent (table 4.2). with substantially increased pricing during the crisis period Such a pattern is understandable, in the sense of wanting (due to a heightened country risk premium), worked against to preserve balance-sheet health, although evaluation has the country team's efforts to support top-tier companies and shown the potential benefits of an alternative approach: high global leaders in distress, as well as healthy medium-size development (and financial) returns and additionality when companies looking for equity. New commitments dropped investing during a crisis. a total of 65 percent between fiscal years 2007 and 2009, al- Most comparable financial institutions were countercycli- though they have started to pick up again in fiscal 2010. The cal in their private sector activities. The flat-lining of IFC approach in Indonesia was similar. Here, non-performing investments in Europe and Central Asia and declines in East loans were reduced to less than 1 percent, as they were in Asia and the Pacific and South Asia were not in step with large Mexico, but new investments fell by more than a quarter be- increases in private investments by the EBRD and EIB (in Eu- tween fiscal 2008 and 2009. rope) and the ADB (in Asia) in the first year of the crisis, ul- Georgia and other low-income countries were notable ex- timately supported by a capital increase in each case. Compa- ceptions to this pattern. In Georgia, IFC developed a spe- rable private sector financial intermediaries, such as Standard cific support plan for the banking sector as part of a massive Chartered, also increased their business (Standard Chartered IFI package to assist the country (a stimulus package total- 2009). IFC's investment volumes followed a similar path to ing around one-third of the country's GDP). Other factors that of the AfDB in Sub-Saharan Africa and the Middle East played a role in this adaptability, including timing (a reaction and North Africa, and IFC commitments fell, but less so than to the conflict with Russia, which preceded the global finan- those of the IADB in Latin America and the Caribbean (table cial crisis), prior relationships with investee banks, and rela- 4.3). Other institutions, like IFC, ramped up their trade fi- nance activities in reaction to the crisis. For example, the ADB tively small country size. In Central America, IFC ramped increased its annual trade finance commitments from noth- up its investments to Honduras and Nicaragua. 7 ing in 2007 to almost $850 million in 2009. In Europe and Central Asia, the EBRD and EIB concentrated more on large, TABLE 4.2 Net IFC Commitments and Net Private Investment Relative to Changes in Country Risk TABLE 4.3 Changes in Private Investments of Perceptions, 2008­09 Multilateral Development Banks, Change in calendar year 2007­09 2009 compared with Quartile based on 2008 Comparator average multilateral institutional IFC total Net direct Region IFC (%) development bank (%) investor country- net com- private in- Average credit risk (IICRR) mitment vestment IICRR Europe & Central changea (%) (%) changea Asia 0 38 (EBRD); 68 (EIB) 1 19.3 8.5 1.5 East Asia & Pacific 8 2 37.1 29.8 0.4 South Asia 6 49 (ADB) 3 49.0 49.7 2.0 Sub-Saharan Africa 0 4 4.2 47.6 7.5 Middle East & North Total 21.7 41.9 2.1 Africa 6 16 (AfDB) Sources: IFC, Economist Intelligence Unit, and Institutional Investor. Latin America & Note: Based on a sample of 97 major economies where data are Caribbean 13 54 (IADB) available. Sources: IFC, EBRD, EIB, ADB, AfDB, and IADB. a. Change of average IICRR in calendar year 2009 compared with calendar year 2008. A negative change indicates perceptions of Note: Compares change in volume of private sector operations increased country investment risk. between calendar years 2007 and 2009. 62 | The World Bank Group's Response to the Global Economic Crisis long-term loans, while IFC focused more on smaller equity the crisis hit and affected by the food and energy crises, IFC transactions, alongside trade finance. stepped up its provision of trade finance, supporting 12 issu- ing banks with over $500 million in guarantees for trade such IFC's sustained focus on LICs, particularly in Sub-Saha- as fertilizer and agriculture goods, iron and steel, plastics and ran Africa, can be viewed as a positive development in the chemicals, and oil, from October 2008 to March 2010. crisis period.8 Given that LICS have largely missed out on the influx of foreign capital in recent years (for instance, the The increase in financing to IDA countries was dominated share of total private capital flows to African countries has by trade finance. While useful in the short term, this may been relatively constant, at 6 percent of overall flows) (World not be a long-term route to investment growth. Of IFC's net Bank 2008a, 2009d, 2010c) and persistently high invest- commitment increase in LICs between 2008 and 2009, about ment risk, it can be argued that IFC has been countercycli- 60 percent came from GTFP guarantees, much of it to support cal among this group of countries. IFC's increased focus on banks in Bangladesh and Vietnam. Trade finance is a relatively the poorest countries during the crisis period can be seen in low-risk pathway to reach SMEs in tough investment environ- figure 4.1, which compares the changes in net IFC commit- ments, including those that are or were affected by conflict ments in different income groups between 2008 and 2009 (Democratic Republic of Congo, Madagascar, and Sierra Le- relative to changes in net private capital flows. one), but the GTFP guarantee product is a short-term prod- uct that is relatively easy to replicate. During the crisis, IFC IFC was strongly countercyclical in a few specific cases. In has had strong additionality in this area, particularly as prices Georgia, GDP growth fell from 12 percent in 2007 to nega- spiked, but as the crisis subsides and prices normalize, IFC tive 4 percent in 2009, and foreign direct investment fell by will have to find new routes to additionality--for instance, by over a half as a result of the dual crises. IFC subsequently working with second-tier banks. 9 In addition, local currency increased its investments in Georgia by around $200 million, lending--where IFC has had limited capacity--will be key in largely due to two sizable co-investments with EBRD in the supporting SMEs in low-income markets. country's two main banks, TBC Bank and Bank of Georgia. The investments were also made out of financial self-interest: A cautious investment approach prevailed in countries to ensure the profitability of IFC's existing investments in with larger IFC exposures, such as Indonesia, Mexico, the these banks. In Pakistan, a country already in conflict when Russian Federation, and Turkey. The external and internal gure 2.1 FIGURE 4.1 Changes in Net IFC Commitments and Net Private Investment by Income Group Sources: IFC and Economist Intelligence Unit. Note: Compares calendar year 2009 with calendar year 2008. Based on a sample of 97 major economies where data were available. Assessment of the World Bank Group Response | 63 re 2.1 environment for new business development became tougher FIGURE 4.2 Productivity of IFC Investment as the crisis unfolded. However, communications to the field Staff, Fiscal Years 2008­10 were also unclear: messages about IFC's countercyclical role were combined with signals to limit new lending, protect the portfolio, and focus on the new initiatives as sources of fresh capital. It took some time for new business develop- ment, especially in Europe and Central Asia, to be restarted. Higher pricing, to reflect higher risk perceptions, held down demand in some markets. Exceptions to the cautious trend were Kazakhstan (which was hit by its own bubble in 2007 and where IFC provided $489 million in investment support, together with advisory services, to some of the largest banks and mobilized over $110 million through loan syndications), Panama (IFC sup- plied $300 million of the IFI package to support the canal expansion, planned before the crisis), and Romania ($144 million in support to financial intermediaries). IFC maintained a strong financial sector focus through trade finance guarantees, but struggled in infrastructure. The relative ease of deployment of trade finance guarantees (short term, approved under delegated authority, and not capital intensive) was in contrast to infrastructure, where IFC Source: IFC. lacked less capital-intensive options to alleviate balance sheet Note: Includes staff involved in investment operations' new busi- ness development who are grade F2 and above, and charged to a concerns. In addition, some projects were scaled back and, project. Global Trade Finance Program staff are excluded. combined with IFC's focus on renewable energy projects and IDA countries, led to smaller average deal size.10 Another fac- tor was IFC's increase in its pricing as market rates rose. More- over, IFC introduced new due diligence procedures, which led erable internal reorganization. IFC has experienced rapid to some projects in Africa being dropped because sponsors organizational change in the last few years, including consid- did not meet requirements. Finally, 17 percent of projects were erable redeployment of staff and reengineering of business canceled or postponed. IFC nonetheless missed opportunities processes. Feedback from staff suggests that these changes for impact, not least because the Infrastructure Crisis Facility have had adverse effects on new business development. First, was not ready to complement investments from IFC's own ac- they have created career uncertainty and presented a distrac- count and to make a dent in the huge financing requirements tion that has negatively affected productivity. Second, exist- of new infrastructure projects around the world. ing incentives have less traction, since managers and staff In agribusiness, IFC activities during the crisis period suf- moving to new teams face few consequences for not meeting fered for a variety of reasons. First, a review of supply chain targets and goals established with their old teams. Third, re- issues (which followed complaints about one project and af- sources are constrained as internal changes absorb manage- fected not only palm oil but also soybean and cocoa invest- rial and staff time, adding to the additional pressure created ments) led to an unanticipated suspension of palm oil invest- by the new crisis initiatives. Looking at productivity in terms ments, meaning that millions of dollars worth of projects in of new business realized compared with investment staff in- the pipeline were dropped or not pursued further. Second, volved with new business (figure 4.2), these points seem to the food crisis had the effect of raising food company profit- be generally supported. Other factors, such as a shift in in- ability in a few cases, which limited the need of some larger centives toward portfolio protection and tighter conditions entities for financial support from IFC. Trade finance and for approving new credit, may also have played a role. liquidity helps agribusiness indirectly, particularly SMEs, al- Implementation of New Initiatives though increases here did little more than offset the drop in Initiative start-up speed can be considered comparable to IFC's direct agribusiness investments. industry standards, but it has been slow in relation to cri- A cross-cutting challenge to IFC's crisis response is consid- sis needs. It takes IFC an average of about nine months to go 64 | The World Bank Group's Response to the Global Economic Crisis from an early review to disbursement in a private equity fund. istic about the time needed for supporting governments and Most initiatives during the crisis started disbursing six to nine other partners to complete their own decision-making pro- months after inception. However, implementation was slow in cesses and to meet their legal requirements before funds could the context of the three-year crisis-response horizon embed- be committed. In terms of supervision, at the operational level ded in the design of IFC's crisis response and given the rec- IFC is tracking bank and country exposure limits, as well as ognized need to front-load assistance for maximum impact. a number of eligibility criteria agreed to with each utilization Meanwhile, other IFIs moved faster to ramp up investments bank. However, the GTLP has yet to create a centralized plat- in the crisis period, in some cases with the aid of capital in- form to systematically record and track issuing-bank expo- creases (EBRD, EIB, Proparco).11 sure across the utilization banks. Also, given its risk-sharing nature, the GTLP relies on the utilization banks such a Ra- In general, the challenges associated with operational im- bobank and Citi to conduct due diligence of the issuing banks, plementation of the new initiatives were underestimated. and then to submit names to IFC for approval. All reports Challenges that materialized included complexities associat- from utilizing banks are currently maintained by the opera- ed with accommodating the preferences and requirements of tions team and help generate communications with internal partners; the need to build institutional capacity to fulfill new and external audiences. A central database/system of record is fiduciary duties involved in managing third-party money; sig- planned for introduction in early fiscal 2011. nificant added demands on staff for design and implementa- tion, which had to be accommodated within a self-imposed The MEF has had strong success in mobilizing funds, but hiring slowdown and in the context of rapid internal reor- project implementation has lagged--one gap is a lack of ganization; weak incentives to put projects on the initiatives' local currency mechanisms. Mobilization was helped by books in countries and sectors where exposure limits have not IFC's strong reputation in the sector and a ready-made net- been binding (most countries and sectors); weak ownership work of partners who were experienced in setting up and in the Regions (origination of the initiatives in Washington running funds. The fund structure replicated an earlier suc- sped up matters initially, but created buy-in problems in the cessful model: the European Microfinance Fund for South- field); the limited the urgency felt by of many public entities east Europe. However, the structure faced some early chal- to make funding commitments in the context of tight fiscal lenges, including aligning accounting procedures with those conditions; and the large number of initiatives and their si- of other donors. multaneous implementation led initially in an uncoordinated Foreign exchange risk and lack of demand for hard curren- approach to donors. cy--the MEF's inability to lend in local currencies--has im- Of the new initiatives, the GTLP has been executed the peded stronger portfolio growth ($122 million in commit- most quickly, with strong innovation and adaption. Beyond ments to date, compared with $442 million mobilized). A inherent structural advantages (wholesaling, rather than indi- newly approved MEF swap that enables local currency lend- vidual transactions),12 the GTLP has been relatively well de- ing may speed disbursements somewhat, but more proactive signed and managed. The program, while run from IFC, was efforts will be needed. In addition, the MEF has generally not presented as an IFC initiative, which enhanced investor been geared toward the two Regions most affected by the cri- buy-in (they could put their own stamp on program achieve- sis, Latin America and the Caribbean and Europe and Central ments), as did customization of the program for different con- Asia, but could do more to reach other Regions. stituencies. A trust fund for investments was established and Implementation of the IFC Capitalization Fund has faced steps taken toward a $1 billion guarantee pool that would be multiple issues that were not entirely foreseen at incep- similar to the GTLP, but is not yet funded (the Swedish Inter- tion. The Japan Bank for International Cooperation (JBIC) national Development Cooperation Agency and OPEC Fund contributed $2 billion while maintaining authorization pow- for International Development have already made funding er on new investments. Given an understandable preference commitments), and a liquidity program was set up that ex- by JBIC to advance deals in Asia, deals in other regions were plicitly targets food and agriculture. The innovative nature of initially pursued with difficulty. Regional capitalization funds the GTLP has been recognized by the market with a number are being created to help address this issue and to raise funds of international awards.13 from investors interested in specific regions. In addition, the While the execution of the GTLP has been quicker than fund had limited staffing at the outset, no fund manager, and that of other new initiatives, it has faced several implemen- severely limited delivery capacity at a time when new sys- tation shortfalls. Notably, deployment speed has been weaker tems and legal structures had to be established (particularly than originally anticipated. The initial planning was unreal- to avoid conflicts of interest). Assessment of the World Bank Group Response | 65 gure 2.1 FIGURE 4.3 IFC Financing Projections, 2009­13 Source: IFC. Deals for the fund are originated by IFC investment offi- years of work in the area of distressed assets; a strong, small cers, which creates additional time pressure as they strive to network of partners with whom to launch the initiative, as meet their own department accountabilities. Moreover, at opposed to having to establish new relationships with new the beginning, staff had no incentive to put deals forward partners; and as an in-house platform, DARP does not face to the fund, and processing procedures were unclear (these the same structural and interest alignment issues that some elements have since been addressed). Finally, while IFC has of the other initiatives have had to resolve. DARP's biggest made numerous investments in funds across the world, it challenges include the impetus to encourage sales of dis- had no record in management of third-party funds when the tressed assets (banks are guarding against selling too low Capitalization Fund was established. or lacking aggressive provisioning against nonperforming The Infrastructure Crisis Facility (ICF) has been the slow- loans); a lack of infrastructure and a network of service pro- est-moving of the investment platforms, with structures viders (reputational risk for IFC); and internal knowledge of that take a long time to set up and weak incentives for po- the products. Links with advisory services are also a work in tential partners to use the facility. The pattern of demand progress. for this facility differed from that initially expected, in that As an in-house platform, the advisory services initiative there was little demand for rollover financing and recapital- has been easier to keep on track. Hiring new staff for some ization. This reduced overall demand for support, although of the activities (the insolvency regime product, for example) new project financing needs were still substantial. On the took time, but otherwise implementation has been broadly in supply side, the time needed to arrange the new structures line with plans. Considerable experience with a wide range and appoint a third-party manager was underestimated. Also, of partners (donors make up about half of IFC advisory ser- IFIs that considered participating directly did not see added vices costs), both to mobilize funding and to align activities value in handing over control of their funds to the ICF. They with donor interests, helped in the relatively smooth appli- originated deals themselves and saw little incentive in turn- cation of this initiative. The only exception was the lack of ing over their implementation to the ICF. Proparco and the uptake of plans for an advisory component of the ICF, which German agency KfW, two key potential partners, ultimately was not pursued because the crisis did not generate imme- carried out the investments through their own accounts. diate demand from governments to help them restructure The Debt and Asset Recovery Program (DARP), although existing public-private partnership transactions (financing the newest of the initiatives (approved in August 2009), needs were their priority concern), and donors accordingly has made some progress. Commitments were at $300 mil- did not provide extra dedicated funds for this purpose. lion at the end of fiscal 2010, and 10 deals had been approved. IFC has shown some flexibility in adapting to changing Factors that contributed to DARP's progress include IFC's 10 circumstances. For example, in April 2009, in the face of 66 | The World Bank Group's Response to the Global Economic Crisis competition and crowding-out between initiatives, IFC es- and perceived. The AMC manages and is responsible to tablished a Back Office Operational Team to coordinate the the investors in its funds, while IFC is responsible to its initiatives and to help manage fiduciary obligations to do- Board members. While co-investment is the objective go- nors and investors. Management also issued directives to ing in, divestment may take place at different times, lead- staff to use the initiatives, in an effort to address ownership ing to varying treatment of the same client. IFC tends to and incentive issues in the Regions (although individual per- be a long-term investor, while funds generally have a more formance awards remained suspended through April 2010). short-term perspective, which may lead to clashing objec- New internal rules and procedures were developed regard- tives. Also, the funds are overseen by an entity (AMC) that ing the use of IFC-managed donor funds for investment has IFC's executive vice president and chief operating of- purposes, and Regional sub-funds and initiatives have been ficer as its chair, and some managers and staff can move established both to accommodate partners' preferences and between the AMC and IFC, which presents further po- to build ownership. Also, products with novel features, such tential conflicts. Challenges related to fiduciary duties and as the GTLP, were discussed by the New Product Group to corporate governance arrangements will need to be given assess and address risks. constant attention as AMC and IFC co-evolve. 14 Given their global nature, the initiatives were not inher- Second, the pursuit of commercial returns for investors ently suited to conditions in some member countries. (IFC Capitalization Fund, MEF) may conflict with the For example, the IFC Capitalization Fund market share re- need for IFC to focus on development impact and addi- quirement (the bank should have at least a 7 percent market tionality. Evaluation shows that financial sustainability tends share) ruled out investments in many MICs facing financial to go hand-in-hand with development impact and addition- sector instability, such as Colombia, Hungary, Mexico, and ality, but the latter could be compromised in the pursuit of Ukraine, since the valuations would be too high for the fund purely commercial interests. Rewarding fund managers for to sustain. achieving financial targets, as in the case of the MEF (assets under management) and the Capitalization Fund (capital ap- Coordination preciation), may limit the urgency of pushing forward with The unprecedented degree of IFC's partnering with oth- achieving difficult development goals in frontier markets. er DFIs and commercial investors, while it took time to develop, has the potential to broaden the effect of IFC's For now, the priority needs to be on disciplined imple- crisis response and to expand its post-crisis role. The new mentation of the initiatives and fulfillment of objectives. partnerships have already helped IFC leverage its own funds Alternatively, initiatives that are no longer relevant could be to support a larger crisis response than it would have been dropped. Delays are particularly costly if they immobilize able to achieve on its own. There is also some evidence that the capital of partners and that of IFC in a general environ- IFC's mobilization efforts will result in the allocation of ad- ment of constrained financial capacity. Strong and consistent ditional funds from government sources for development monitoring and evaluation (M&E) of performance will be a purposes and, specifically, for private sector development. In necessary component as implementation proceeds, and here particular, the Asset Management Company (AMC) has the current practices (described above) will need to improve. potential to materially shift IFC's funding model and devel- At the country level, there appears to have been a rise in opment reach. By 2013, it is anticipated that some $10 bil- joint IFI operations in the crisis period. IFIs shared pipe- lion of investments would be supported by mobilized funds, line data in some Regions (Europe and Central Asia and nearly matching IFC's own investments in the Region of $16 Latin America and the Caribbean), conducted joint due billion, for total financing of $26 billion. diligence, and realized more joint deals than in the pre- As new partnerships develop, important risks are likely crisis period, a time acknowledged by IFIs as one in which to emerge that need to be managed carefully--notably competition was more the norm than collaboration.15 The conflict of interest. Separate legal entities have been most notable case of cooperation in a single project was the created (the AMC and the entities it oversees, the IFC combined support for the $2.3 billion Panama Canal expan- Capitalization Fund, and the Sovereign Wealth Fund) to sion, to which IFC contributed $300 million. The project help reduce potential legal liability to IFC, and manag- had originally been expected to blend commercial and IFI ers and staff have been hired from outside IFC. Synergies finance, but was ultimately financed by IFIs, because com- are apparent--for example, investments are originated, mercial investors pulled back. Table 4.4 shows the patterns in processed, supervised, and exited through regular IFC joint deals between IFC and other IFIs among the countries investment operations. But there are also conflicts, real that IEG visited. The number and volume of joint deals more Assessment of the World Bank Group Response | 67 TABLE 4.4 Private Sector Deals Supported Jointly by IFC and Other IFIs in Case Study Countries, 2008­10 2008 2009 2010 Case study country Number $ million Number $ million Number $ million Bangladesh 0 0 0 0 1 12 Colombia 0 0 2 52.7 4 126 Georgia 0 0 2 170 1 20 Hungary 0 0 0 0 0 0 Indonesia 0 0 1 40 0 0 Jordan 1 120 0 0 0 0 Mexico 0 0 1 12 3 95 Nigeria 0 0 2 15 2 14 Ukraine 1 50 0 0 3 81 Vietnam 2 7 2 35 1 24 Total 4 177 10 334.7 15 372 Source: IEG. than doubled between fiscal 2008 and 2010. and needs to evolve with changes in the external environ- Within the Bank Group, IFC has largely carried out its cri- ment. A key policy task is to ensure a smooth transition of sis response in parallel with the World Bank and MIGA, demand from government to the private sector. This requires rather than through joint plans and activities. Each insti- exploiting synergies within the Bank Group to support the tution focused on similar areas (financial sector, infrastruc- private sector through policies, regulation, and access to ture), although generally not through direct cooperative finance, while also strengthening government capacities to efforts. Joint Bank/IFC projects show an increase between regulate private sector activities effectively. fiscal 2008 and 2009, from 6 to 15, although this represents Coordination between IFC investment and advisory op- only 7 percent of IFC's projects in IDA countries (World erations has been stronger than in the past, although there Bank 2010g). Through its joint marketing agreement, IFC is still room for greater integration. Advisory services op- and MIGA recently agreed to several joint transactions. erations have supported IFC's investment operations during IFC's capital position and deliberate preference for port- the crisis period in trade finance, microfinance, and nonper- folio protection limited joint initiatives. IFC's moderate forming loan management. At the same time, new advisory capital headroom has meant that IFC could not come close to services activities have focused more on awareness-building matching the increased lending of the IBRD, which limited and diagnostics than on implementation of capacity-building cooperation potential to some extent. Given IFC's deliberate measures and generation of new investment opportunities.16 preference for portfolio management over new business, the Early Outcomes two institutions often went in opposite directions in terms of IFC's new initiatives initially had positive signaling effects financing support to countries, as in Indonesia and Mexico. on market psychology and contributed to the perception Even accounting for IFC's balance sheet constraint, the value of a vigorous global response to the crisis. The initiatives added of the World Bank Group could have been enhanced were designed quickly and announced at the height of the by greater alignment of operations--for instance, in support crisis, and some were incorporated in announcements by the of new infrastructure public-private partnership arrange- G-20. Nevertheless, impact has lagged expectations, due to ments that lacked the requisite financing, bank capitaliza- the slower-than-expected implementation (deployment is tions, and financial sector restructuring (as long as conflict less than half of what was expected by now) and lower lever- of interest issues could have been managed properly). age than originally anticipated. Collaboration between the World Bank, IFC, and MIGA Two initiatives have had strong achievements to date in is important for an enhanced Bank Group crisis impact addressing critical crisis needs: the GTFP and the GTLP. 68 | The World Bank Group's Response to the Global Economic Crisis somewhat stronger, however, which may reflect the less- TABLE 4.5 Performance of the GTFP and the stringent IDA reach target of the GTLP (20 percent). GTLP, July 2008 to June 2010 At the sector level, comparisons are more difficult to make GTFP (July 2008 GTLP (July 2008 Activity to June 2010) to June 2010) because of weaker tracking in the case of the GTLP. The $1.5 billion GTFP has supported over 50 industries during the crisis pe- $5.8 billion (100% ($0.34 billion riod. These ranged from agricultural goods (21 percent) and Funds deployed from IFC) from IFC)a oil and gas (17 percent) to consumer goods (3 percent) and Funding mobilization plastic and rubber products (2 percent).17 The GTLP tracks ratio 1:1 3.5:1 goods supported, which seems to indicate that agriculture Number of utilizing and forestry, oil and gas, mining and metals, and low-end banks 160 7 industry were the main industries involved, but aggregation Volume of trade is difficult due to multiple classifications and dissimilar sys- supported $7 billion $6.1 billion tems in different banks. This result is possibly a trade-off of Trade $ supported/ IFC the more wholesale approach of the GTLP and less oversight 1.2:1 18:1 commitments leverage of issuing banks. Number of trade 7,950 4,178 transactions The wide reach of the GTFP and the GTLP potentially Trade # supported/ IFC $729,560 pro rata $239,349 pro provide IFC with tremendous sector and country knowl- commitments cost to IFC per rata cost to IFC edge, but this potential may not be realized. The GTFP has leverage transaction per transaction led to a number of realized investments by IFC, but the vol- Percent share of transac- 7%b 9% ume is small relative to the overall reach of the GTFP. More tions supporting SMEs ($) proactive sharing and analysis of GTFP data may be helpful Percent share of transac- going forward. 52% b 74% tions supporting SMEs (#) Percent share in Africa ($) 25% 17% Among the other initiatives, while MEF implementation has lagged, signs are promising. The MEF has invested in Percent share in Africa (#) 21% 7% 17 microfinance institutions in 9 countries in 2 Regions-- Percent share in IDA ($) 51% 29% Latin America and the Caribbean (35 percent) and Europe Percent share in IDA (#) 53% b 19% and Central Asia (65 percent)--reaching over 1.6 million Average size of trade $0.9 million $1.5 million people, most of whom are either women or rural inhabit- transactions ants (or both). Most countries in which the MEF is operat- Average tenor 5 months 6 months ing have seen reductions in GDP growth (with an average Source: IFC. decline of 8.5 percentage points), and four of the nine dipped a. Not including parallel financing. into negative growth, indicating some degree of addressing b. To March 2010 (full transaction by transaction data not yet avail- country needs, and not simply to strong existing clients. able through June 2010). SME transactions are those with guarantees Ultimately, the MEF expects to support more than 100 mi- of less than $1m. crofinance institutions in 40 countries by 2014, to support lending to 60 million low-income borrowers, so consider- able implementation progress is still needed. These programs have had the broadest reach of all the initia- tives during the crisis period, with particularly high leverag- The distressed asset platform is beginning to address a ing of IFC resources in the GTLP. During fiscal years 2009 substantial demand gap. As non-performing loans con- and 2010, the GTLP supported $6.1 billion in trade through tinue to rise, especially in Europe and Central Asia, there is over 4,000 trade transactions and deployment of $1.5 billion a growing demand for distressed asset purchases. DARP is in funds ($0.3 billion from IFC) through 7 banks. This con- beginning to address this need, with 10 projects approved trasts with $7 billion in trade supported through the GTFP to date (investments in nonperforming loan pools, service during the crisis period through nearly 8,000 trade transac- providers, and restructurings) that have the potential to help tions and $5.8 billion in guarantees from IFC. In each case, stabilize financial sectors and contribute to maintaining pro- IFC has been able to target SMEs and to make a contribution ductive capacity and economic activity. The need for a net- to trade in Sub-Saharan Africa with relatively low transac- work of service providers may, however, suggest an issue of tion costs (table 4.5). The IDA reach of the GTFP has been timing with the roll-out of the initiative. Faster uptake of the third phase of IFC's crisis-response strategy--accelerating Assessment of the World Bank Group Response | 69 the recovery--may have been possible with the required in- It is too early to assess the full development results of indi- frastructure in place. vidual operations. But it can be observed that opportuni- ties for strong additionality and development impact were Progress with the bank capitalization and infrastructure missed. This is apparent, given the huge private sector financ- initiatives is less encouraging. The three deals committed ing gaps that emerged across a range of sectors and countries. through the IFC Capitalization Fund have helped build a de- Feedback from country visits indicated frustration that IFC gree of market confidence in Paraguay, the Philippines, and had not been able to match the upward pattern of private sec- Serbia, but the fund has had no deals, and thus no impact, else- tor investments of other IFIs and help to fill growing financing where. The ICF has committed to three deals. One of these was gaps. Experience of past crises shows distinctly that IFC has a $10 million investment to support a port project in Vietnam the best chance of maximizing its additionality and develop- that was at risk of being dropped or postponed, although the ment impact if it makes an investment commitment in the project may have survived without the ICF's nominal contribu- 12 months following the onset of a crisis (figure 4.4). tion (less than 7 percent of the overall financing package). With few funds disbursed, the facility has yet to have much traction. Experience has shown the importance of visible IFC invest- The ICF may have had a mobilizing effect, in that one of the IFIs ments in large flagship companies of systemic importance to interested in supporting the ICF (Proparco) has increased its a country, which sends strong signals to other market play- own infrastructure investments.18 ers (IEG 2008a). Only a few investments met this standard during this crisis (table 4.6). In the countries IEG visited as IFC's advisory work in response to the crisis has generally part of this evaluation, while over half of investments were cri- been appreciated by clients, although it has had limited sis-response or crisis-related interventions, less than a quarter effect in producing institutional changes. IFC has carried of investments were with companies of systemic importance. out a number of awareness-building workshops, as well as Systemic interventions made up a major share of investments diagnostic work with specific institutions, covering nonper- in Georgia and half of the investments in Nigeria, but repre- forming loan management. However, few activities have led sented a small share of new business in the other countries that to implementation of specific institutional change programs. IEG visited. Box 4.8 looks at the nature of the systemic crisis IFC's work on insolvency regimes has also not yet had much response by IFC in Georgia, the conditions that enabled it, and impact in bringing about systemic changes. possible lessons that can be drawn. Going forward, M&E of the initiatives will need to be Among the nonsystemic interventions, while IFC's impact made more systematic. Most of the new platforms were es- on the market was weaker and more localized, its financial tablished with accompanying results frameworks, but these additionality was usually noticeable. For example, an invest- frameworks have focused more on funds mobilization and ment in a telecommunications company in Nigeria was the financial targets than on achievement of development goals. direct result of a lack of alternative finance for the company. Also, where development-reach targets, such as IDA concen- This was also the case for two wind farm investments in Co- tration, were considered, they were sometimes left to be de- lombia, where the company had been in advanced discussions termined, as in the case of the bank capitalization platform. with commercial banks when the crisis hit. Or targets have been set at a level that was less ambitious than the targets for IFC as a whole (20 percent of projects in The prospects for impact going forward will be influenced the case of the ICF, versus 50 percent for IFC overall).19 by how well IFC shifts from a defensive portfolio manage- ment posture to more aggressively developing new busi- Reporting of performance has been taking place at dif- ness--including through the Asset Management Company. ferent intervals and at varying levels of detail. The GTLP As more capital becomes available to IFC through a combina- program, for example, has not monitored sector distribution tion of returning profitability, a $200 million selective capital closely and consistently (it has collected goods descriptions increase, possible issuance of a hybrid bond, and higher levels from utilization banks, although they are not in a standard of external funds mobilization, IFC will have an opportunity format that could be readily aggregated by sector/industry). to be more aggressive in new business development. It will The use of external fund managers has further complicated be important to make new investments in countries with im- M&E, because they report progress using their own systems proving economic conditions (evaluation has shown the de- (MEF), which are not necessarily consistent with those of velopment and financial benefit of such an approach) and to IFC. With the exception of DARP, the new investment plat- maintain support to countries and Regions with persistent, forms have yet to be covered by the regular IFC M&E frame- high levels of poverty and low levels of private investment, work. This is also the case with the GTFP, even though it was notably in Sub-Saharan Africa. established in 2004.20 70 | The World Bank Group's Response to the Global Economic Crisis gure 2.1 FIGURE 4.4 Additionality and Development Outcomes of IFC Investment Operations in Past Crises Source: IEG. Note: Based on the number of months between the onset of a crisis and the investment commitment by IFC. Countries included in the analysis: China, December 1998; Brazil, October 1998; Russian Federation, August 1998; Korea, August 1997; Mexico, December 1994; Turkey, April 1994 and November 2000; Indonesia, November 1997; Argentina, December 2001; Thailand, July 1997; the Philippines, July 1997; Viet- nam, 1997; Ecuador, August 1998; and Lithuania, December 1995. TABLE 4.6 Nature of IFC Investments in Case Study Countries Crisis Number of inter- Volume of interventions Crisis Crisis response and ventions (fiscal (fiscal 2009 through response (%) relevant (%) Other (%) systemic (%) 2009 through Q3 Q3 2010), Country 2010) US$ million # $ # $ # $ # $ Bangladesh 6 164 67 85 0 0 33 15 0 0 Colombia 15 244 7 2 13 28 80 70 7 2 Georgia 6 231 84 78 0 0 14 22 84 78 Hungary 0 0 0 0 0 0 0 0 0 0 Indonesia 9 224 22 20 56 75 22 5 11 18 Jordan 7 156 57 57 29 36 14 7 29 22 Mexico 18 248 11 63 6 5 83 32 6 61 Nigeria 14 841 50 81 7 5 43 14 50 31 Ukraine 9 262 44 26 22 39 34 35 0 0 Vietnam 9 391 56 90 0 0 44 10 33 68 Average 10 307 44 56 15 21 41 23 24 31 Source: IEG. Note: Crisis response interventions are those that are part of IFC's crisis-response framework at either the global, Regional, or country level. Crisis- relevant interventions are those that, although not part of the global, Regional, or country-level crisis response, did help to address financing needs related to the crisis. Assessment of the World Bank Group Response | 71 BOX 4.8 GEORGIA: A SYSTEMIC CRISIS RESPONSE BY IFC The dual crises in Georgia in 2008 had strong adverse effects on the economy: trade fell by a third, private capital inflows dropped by more than half, and remittances and tourism were also badly affected. Growth slowed sharply, and declined in 2009. There was an initial run on deposits, and confidence in the banking sector was very fragile. IFC interventions As part of the quickly developed IFI package for Georgia, supported by the Bank-led joint needs assessment, IFC has made $182 million worth of investments (loans, interest rate swaps, and trade finance lines) to help recapitalize the country's two leading banks, Bank of Georgia and TBC. These banks represented more than half of banking sector assets at the time, and were both IFC clients. The EBRD provided cofinancing of a similar value, alongside smaller investments by the Netherlands Development Finance Company (FMO) and the German Finance Company for Investments in Developing Countries (DEG). Early outcomes The banking sector was prevented from collapsing, and confidence has returned (deposits are on an upward path and lending to SMEs is restarting). According to one key stakeholder, IFC and the EBRD made "useful public good interventions." However, foreign currency dependence remains (over three-quarters of loans are denominated in U.S. dollars). Lessons · Speed and scale. Rapid IFI responses with significant commitments of financing were important in maintaining confidence in the country and, specifically, fostering banking sector stability. · Existing relationships. Country presence and existing relationships with key banking sector players (TBC and Bank of Georgia) helped IFC's responsiveness. It also meant IFC had a financial interest (ensuring sustainability of prior investments). · Strong coordination. The value of a quick and comprehensive joint needs assessment, which provided a clear division of labor among IFIs (and facilitated investment front-loading), was clear. · Strategic fit. IFC's corporate strategic focus on IDA and post-conflict countries fit with the country profile of Georgia. · Client commitment and institutional strength. Strong government ownership and capacity, with clear objectives, had a material effect on the speed and nature of the response. · Small country. It was realistic for IFC to seek to have a systemic effect. Challenges Several important challenges nonetheless remain. These include: majority IFI ownership in the banks (there is a need to divest and support long-term banking sector development); local currency/capital market development; boosting real sector lending; sound risk management in good times (through portfolio diversification in particular); and more balanced growth in the economy, away from more speculative sectors such as real estate. Source: IEG. Future impact will also hinge on how well IFC meets the addressed, include tough business climates, weak sponsors, special challenges of operating in IDA countries, particu- and less-than-satisfactory IFC work quality (in appraisal larly in Africa. As it continues to increase its activities in and supervision, including that in the area of environmen- poor countries, IFC needs a sharp focus on its development tal and social effects, where additional capacity-building results. IFC performance has historically been weakest in efforts may be required). Africa, and it is not certain that a higher level of investing will lead to proportionately stronger development impact. Assessment of MIGA's Response Some sectors have fared better than others, notably infra- structure, while financial sector investments have gener- MIGA's heavy focus on the financial sector in the Europe ally achieved lesser results. Environmental and social per- and Central Asia Region in its new business operations formance have also been poor. Key challenges, which have during the crisis period was in line with initial crisis needs. consistently held down performance and will need to be The financial sector in the Europe and Central Asia Region 72 | The World Bank Group's Response to the Global Economic Crisis was at the heart of the crisis and there was an urgent need for As recognized before the crisis, but even more urgent support. MIGA supported several key European banks in the now, MIGA needs to revamp and refocus its business Region and helped them to recapitalize foreign subsidiaries development activities in order to improve its capacity to that had been weakened by the crisis. The drop in cancella- respond better to meet crisis-related political risk insurance tions also meant that MIGA played a supportive crisis role demands,21 as well as to meet its own business goals and to with existing clients. use the new opportunities provided by its recently amend- ed Convention. The joint marketing agreement signed by Nevertheless, MIGA's response did little to address IFC and MIGA in February 2009 and broadened in March needs for new political risk insurance outside the Eu- 2010, to allow deployment of MIGA staff to IFC offices in rope and Central Asia Region. Political risk is consis- East Asia, is an important initiative, giving MIGA access to tently a top concern for investors in developing countries IFC's field presence and enabling cross-selling of services.22 (MIGA 2009). However, MIGA's unduly restrictive Con- This arrangement has begun to produce a small pipeline of vention has been a major constraint on its ability to sup- deals. port the type of transactions most in demand for political risk insurance. The changes in MIGA's Convention, in To improve its capacity to respond, MIGA also needs effect from November 2010, will give MIGA significantly to address several other internal constraints, including broader scope. Awareness of MIGA among major private- simplifying cumbersome business processes, aligning its sector parties in the countries visited for this evaluation incentive framework to business goals, and improving un- was very low, indicating a need for MIGA to strengthen derwriting quality. Addressing these internal constraints is its business development function and to address inter- a must if MIGA is to make use of the greater product flex- nal constraints to its client responsiveness, including slow ibility and new opportunities provided by the change in its business processes. Convention to improve its responsiveness. Assessment of the World Bank Group Response | 73 This first report of the evaluation of the Chapter 5 Bank Group response to the global eco- nomic crisis has focused on key aspects of the design, implementation, and early outcomes of that response. This chapter distills the lessons learned from and issues raised by the analysis thus far, focused on both possible future crisis episodes and responses and the more immediate--and in some cases remedial--issues of quality, impact, and sustainability of the measures taken to date. Photo courtesy of Francis Dobbs/World Bank. Lessons and Issues for the Future Introduction This first report of the evaluation of the Bank Group response to the global economic crisis has focused on key aspects of the design, implementation, and early outcomes of that response. This chapter distills the lessons learned from and issues raised by the analysis thus far, focused on both possible future crisis episodes and responses and the more immediate--and in some cases remedial-- issues of quality, impact, and sustain- ability of the measures taken to date. At the same time, the further evolution of the crisis is still fully address crisis needs, that additional instruments unclear, even after the considerable improvements expe- might also be needed for initial liquidity support as part rienced by most developing countries during the second of multi-partner packages, and that internal organiza- half of 2009 and the first quarter of 2010. Recent develop- tional arrangements affect preparedness, timeliness of ments in Europe cast doubts on the speed and strength of response, and appropriateness of instruments. the overall recovery in the world economy, and this could · Coordination with partners. The Brief noted that differ- put renewed pressure on global demand and, therefore, on ences in view surface quickly during crises, waste time, developing-country exports and private capital flows. These and undermine institutional effectiveness and results. risks of a prolonged recession have implications for the de- mand for Bank Group financing going forward, and for the · Timing and nature of IFC investments. IFC's addition- Bank Group's ability to meet that demand, even after the ality is stronger following a crisis and is associated with general capital increase negotiated in fiscal 2010. better development results. Key IFC interventions--in- vestment in flagship companies, visible restructurings of In these turbulent times, the current real-time evaluation, major industrial clients, or large syndications of commer- and the issues and lessons gleaned from it, take on critical cial bank loans, for instance--that capitalize on its reputa- importance. tion as an investor and honest broker can have a strong signaling effect that helps restore market confidence, par- Lessons from Past Crises ticularly if announced at the peak of market uncertainty. IEG's Evaluation Brief, "Lessons from World Bank Group · Opportunities and constraints for greater IFC impact. Responses to Past Financial Crises," issued at the height Crises can present opportunities to reach new clients of the global economic crisis in December 2008, pointed and to be rewarded for taking risks. But opportunities to several areas that require close attention (IEG 2008a). are often missed because staff attention was diverted and These included: because of efforts to restructure existing projects, which · Quality, focus, and selectivity. The Brief noted that the undermines IFC's ability to function as a countercyclical speed and quality of the Bank response were crucial for financier. good outcomes both during and after crises, and that · IFC's internal practices. IFC's effectiveness was better past crisis support was much more successful when it when it acted quickly to adapt its strategies, programs, was nested in a results framework (explicit or implicit) and exposure to deteriorating economic conditions. that incorporated post-crisis recovery, had selective cov- erage, and focused on the Bank's comparative strengths. · MIGA's risk-mitigation capacity. This was tested by past crises, during which two of the three claims in MIGA's · Financing modalities and organizational arrange- entire history were paid. Political risk--the mitigation of ments. The Brief noted that programmatic development which is MIGA's mandate--is often heightened during policy lending, not available in earlier crises, could use- crises, and infrastructure projects that are inadequately 76 | The World Bank Group's Response to the Global Economic Crisis structured or awarded in a nontransparent manner were World Bank particularly vulnerable to political risk events. Continuing Bank involvement, active policy dialogue, and good analytical work are important prerequisites. To a large extent, this first phase of the Bank Group's crisis- This is evident from the case study countries--both where response evaluation has reaffirmed the importance of the the Bank Group response worked well--as in Indonesia, above areas. It has also found evidence that some of these Mauritius, Mexico, and Ukraine--and where it did not-- lessons were incorporated in the current crisis response and as in Hungary, where the Bank had ended its involvement that further progress is needed, particularly in the areas of with the country's graduation. instruments, organizational arrangements, nature and tim- ing of IFC investments, and internal coordination within the The Bank should balance advocating global priorities Bank Group. with country ownership. One particular lesson from the country studies is that the Bank's identified sectoral and Emerging Lessons thematic crisis-response priorities, whether in special ini- tiatives or otherwise, need to be presented as menus for An overarching lesson emerging from this evaluation relates countries' selection to avoid the possible impression of ad- to the value of a strategic approach to the World Bank Group's vocacy, especially where the Bank may be a financier. Bank crisis-response effort, integrating six elements brought to the advice about cross-sectoral spending priorities needs to be fore by of this crisis experience. grounded in transparent and objective public expenditure First, in these uncertain times, early warning, preparedness, analysis that takes into account relative benefits and costs and timeliness, including an eye to long-term capital ade- across sectors--and trade-offs across sectors and time--in quacy, are key attributes for the World Bank and IFC. the context of a broader analysis of macroeconomic, fiscal, and public-sector debt sustainability. Second, the benefits of the Bank's country focus go hand- in-hand with the need for a cross-country strategy to ensure Greater clarity is needed on the use of instruments for consistency with global initiatives and to deploy scarce re- crisis response. This is necessary to ensure that resources sources where they produce the best results. are allocated for the greatest impact, given country needs and global priorities. It is also necessary to ensure rapid Third, even as it responds to crisis, the World Bank Group processing of lending operations. Country studies have needs to keep the requisites of sustainable long-term shown that teams used DPOs, additional financing, and growth--among others, fiscal and debt sustainability, the other instruments in innovative ways, with the endorse- structural reform agenda, and the environmental and cli- ment of the Operations Committee and the approval of the mate change agenda--in focus. Fourth, particularly in averting a crisis, it is costly to let the Bank's expertise in key areas (in this case, the financial sec- tor) decline. Fifth, there is a need to balance innovations and new initia- tives in the middle of a crisis with continuity of support us- ing more established and proven approaches. And sixth, coordination is needed among the World Bank, IFC, and MIGA (and with other partners) to capitalize on linkages across government and business and to catalyze economic activity. The findings also point to specific early lessons for each Bank Photo courtesy of Uri Mechitov/World Bank. Group institution. Lessons and Issues for the Future | 77 Board. However, greater clarity on policy conditionality of response engagement. In addition, the evaluation points crisis operations would have facilitated the Bank's response. to the importance of ensuring sufficiently frequent data collection and interpretation to track the poverty and Especially in turbulent times, the Bank needs to be better social impacts of Bank engagement more accurately positioned to anticipate crises, more sensitive to crisis risks and to reduce reliance on estimates and projections. and early warning signals, and ready to act in a timely man- ner that preserves quality. The Bank was not ready when the · Looking forward, the Bank needs to guard against the crisis struck, and more anticipation and early warning would risk of AAA being "crowded out." The Bank's extraor- have facilitated its response. In this respect, the evaluation dinary lending response to the crisis, which involved ac- points strongly to the following specific lessons: celerating project preparation, will most likely have run down its pipeline of future lending operations. Equally, · The Bank needs to update and share economic and fi- the increased stock of cumulative commitments is likely nancial projections when they have changed substan- to require a more intensive implementation-support ef- tially as part of its role in providing early warning and fort. With a relatively flat administrative budget outlook alerts to clients and the international community. In in the near-term, the risk that a combination of increased hindsight, an example is the value that could have been lending preparation (to rebuild the project pipeline) and derived from sharing updates at the Annual Meetings heightened supervision will crowd out AAA efforts needs and Development Committee Meeting of October 2008. to be guarded against. No less than the quality of future · The Bank's capacity in the financial sector needs to be lending is at stake, whether this takes the form of invest- maintained. It was a mistake to let the Bank's capacity ment lending or of DPOs. The extent to which DPO- in this area lapse, especially in light of the implications supported country programs, in particular, can generate for the Bank's relevance to the dialogue with MICs and sustainable growth depends crucially on their structural in times of crisis. This was an important lesson of the reform content; in turn, identifying the structural reform East Asian crisis, and had led to a major investment by agenda with sufficient specificity hinges on high-quality the Bank in critical skills, many of which have now been AAA. eroded. The Bank's 2007 financial sector strategy was, in hindsight, excessively laissez-faire with regard to the · The IBRD's financial headroom in a crisis is central. This experience reveals the importance of anticipating capital institution's role in helping to detect and address struc- adequacy at the outset, as well as its use during the cri- tural weaknesses. As the Bank rebuilds in the financial sis. The IBRD's financial headroom--the result, in part, sector, it should also not lose sight of the lessons learned of a prudent financial policy, and in large measure of low from an even earlier era of financial sector reform and pre-crisis lending driven by lack of client demand--was development, both at the policy level--on the need for a crucial factor underlying the crisis response, but is now steadfast attention to capital adequacy, independent su- largely used up. With the likely continuation of market pervision and regulations, and timely and transparent volatility, middle-income country demand for countercy- reporting--and in investment lending--on the need to clical IBRD lending is likely to remain robust. With the ensure that participating financial intermediaries have IBRD's previous "excess" capital largely committed, and balanced assets and liabilities with respect to maturities a relatively small new capital increase recently approved, and foreign exchange exposure. how constrained will IBRD's response to the next crisis be, · It is vital to be up-to-date on diagnostic country ESW even if the current recovery escapes a "double dip"? How in key areas. IEG evaluations established the critical will the Bank ration borrower access? During the period importance of a strong portfolio of diagnostic ESW to between the East Asian crisis and this one, countries such inform the dialogue and underpin lending year after as Indonesia and Mexico prepaid IBRD loans, rebuilding year. This evaluation reaffirms that lesson, with particu- their headroom for future borrowing while increasing the lar emphasis on crisis situations, which by their nature Bank's headroom for future lending. New instruments will always have a stochastic element. It also reaffirms need to be put in place, involving shorter maturities or a the particular importance of Public Expenditure Re- combination of pricing and maturities that encourage early views as a signature Bank contribution in supporting payback, possibly with a countercyclical financing facility, country efforts to prioritize across sectors and pro- as adopted by other multilateral banks. grams--whether in the context of stimulus or austerity IDA must remain the Bank's flagship resource-mobiliza- packages--especially in light of the evaluation's finding tion activity. IDA fast-tracking helped to speed the process- of advocacy rather than analysis in some sectoral crisis- 78 | The World Bank Group's Response to the Global Economic Crisis ing of eligible operations, but was no substitute for increased will need to be sufficiently sensitive to partner needs and in- resources. IDA disbursed 15 percent more in fiscal 2009­10 stitutional arrangements and create the right incentives for than in fiscal 2007­08 and committed 24 percent more. Al- them to participate fully in joint programs. though this was a substantial response, it was much smaller Responding to the crisis through existing platforms and than that of the IBRD. And because the broader IDA15 re- partnerships has proved more effective than working source envelope was agreed in 2007, there is by definition no through new ones. Experience of this crisis shows clearly crisis-response additionality. Though MICs have generally the benefits of having financing and advisory platforms been more affected by the crisis, given their greater linkages based on existing arrangements and relationships "ready to global financial markets, LICs are far less able to bear the for use" (or, at least, easy to use). While innovation can be costs of the crisis, and hence there is a need for greater Bank important, it would be unwise in a future crisis for IFC to proactivity on their behalf, which the work on the Crisis Re- develop numerous new financing platforms on the run, as it sponse Window aims to solve. did in this crisis--particularly platforms managed by third Finally, it is crucial to assess emerging impacts early to identify parties or that involve fund-raising from multiple, previ- quality problems and risks and remedial action. The evaluation ously untapped sources. identified quality risks and concerns in sectoral DPOs, espe- In another crisis, IFC's additionality and development im- cially in the financial sector and in infrastructure. pact would likely be stronger if IFC built on or adapted exist- IFC ing programs and relationships rather than establishing new IFC's development role is vital, and looking beyond ones (at least new initiatives should probably be managed portfolio protection is essential if that role is to be through in-house platforms and draw on existing partner- fulfilled. In the future, IFC will need to have sufficient ships for funding), given the crucial resources and time that resources for a significant catalytic role when a new cri- are eaten up in the start-up phase of new initiatives. As an sis strikes, and be willing to take on greater investment immediate goal, IFC will need to step up implementation risk--as it has done in Africa--so that it can leverage its of the current crisis platforms, where still relevant, includ- global reach to play a countercyclical role. Incentives and ing more robust and consistent M&E arrangements to help mechanisms for increased equity divestment during years guide resource allocation. of economic expansion, so that IFC is not sitting on major Finding the right level of adaptation to changing circum- unrealized equity gains when a crisis hits, could also be stances is fundamental for an effective crisis response. helpful in freeing up funds for a crisis response. Active, Careful consideration will need to be given to what change routine portfolio stress testing can be useful, as opposed is needed with respect to the role of IFC's initiatives in the to reactive portfolio management that may crowd out new coming years, as well as the pace of internal organization business, as in this crisis. and pricing changes in a future crisis. Adaptation has been A crisis response by IFC has to be founded on partner- a key ingredient of success for new initiatives where IFC has ships, but cooperation needs the right incentives and sup- shown flexibility, in addressing specific country crisis needs porting structures. Given the vast financing needs that a where IFC has tailored its approach, and in instrument selec- multi-country crisis generates, no single development insti- tion. Lack of adaptation has held back investments in many tution has sufficient capacity to respond. Partnerships thus countries (notably, the pressure to focus on portfolio man- have the potential to make crisis-response initiatives more agement at the expense of new business and slow changes credible and effective. In this case, IFC's unprecedented co- in country strategy in many cases). Too much adaptation operation with other IFIs and private sector partners sent may also have been damaging to IFC's countercyclical role important stabilizing signals to the market. (considerable internal reorganization, plus rapid increases in pricing in some cases). But there were different levels of success with the coopera- tive arrangements embodied in IFC's crisis initiatives. In Going forward, IFC will need to find the right level of adap- some cases, partnerships allowed for effective leveraging of tation, including determining which initiatives continue to IFC funds (GTLP, MEF), particularly where the initiatives have relevance and which might be dropped (or put on the were not seen as solely IFC programs and where IFC's sector back burner and revived in the event of another crisis), and expertise was clearly recognized. In other cases, cooperation how new partnerships and organizational structures are best stalled because of nonaligned interests and decision-making aligned with IFC's overall business model. Ensuring adequate procedures, incentive problems, and legal issues (capitaliza- skills and incentives for equity origination will be important tion fund and infrastructure facility). Going forward, IFC with respect to the Asset Management Company, as will deliv- Lessons and Issues for the Future | 79 ering on fiduciary duties and obligations. In a future crisis, IFC MIGA may also want to postpone rapid internal reorganization and For MIGA, the crisis has amplified the need for more develop mechanisms to incorporate local views and knowl- product flexibility and enhancement of business de- edge to enable a differentiated local crisis response. velopment. While MIGA's portfolio experienced a net increase during the crisis period (due to lower cancella- The shift in IFC instruments toward trade finance guar- tions), and MIGA's focus on the financial sector in the Eu- antees was useful. Instrument mix will need to shift again rope and Central Asia Region was strong, MIGA's guaran- as the recovery takes hold and to prepare for a future crisis. tees have been basically flat since before the crisis, and its Short-term trade finance was useful to quickly address crisis response did little to address needs for new political risk needs, since it could be ramped up relatively easily through insurance outside the Europe and Central Asia Region. IFC's significant network of utilization banks and could help This reflected the inherent structural constraint of MIGA's address access to credit shortfalls. It also had the advantage restrictive Convention, which until end-2010 will prohibit of absorbing less capital than other instruments. Beyond it from insuring loans without associated equity invest- the crisis, as commercial providers enter (or re-enter) the ments or insuring the financing of existing assets, as well market and IFC becomes less competitive on price, IFC will as weak business development. As mentioned in the IEG need to look down market (to second-tier banks) and to report "Achieving Value-Driven Volume: MIGA's Devel- other instruments to enhance its development reach and ad- opment Results and Institutional Effectiveness--2010," ditionality, including working with more traditional invest- MIGA needs to revamp its business development function ment tools in frontier markets. Enhanced direct support to to reverse the current stagnation in guarantee issuance infrastructure, agribusiness, and local capital markets devel- and to enable it to meet business volume targets and stra- opment will be important, especially in IDA countries. De- tegic priority goals. The recent approval of the changes to velopment of finance capacity in local currencies will also be MIGA's Convention to allow greater product flexibility is one key component. Capacity to offer local currency finance an important step forward and now needs to be accompa- was again lacking in this crisis, as in previous ones, creat- nied by more proactive business development efforts and ing considerable risks for SME clients with local currency other internal productivity enhancements by MIGA. revenue streams. M&E arrangements for new initiatives will need to im- Issues Going Forward prove. The importance of robust results frameworks and rig- orous M&E is well recognized, as is their role as foundations The crisis created an immediate need for countercyclical for achieving strong impact. IFC management has moved in spending in developing countries, which the Bank Group and this direction in the past five years, with measures including others have supported. To help sustain the recovery, contrib- the establishment of department performance scorecards ute to longer-term growth, and improve the response capacity and the introduction of a Development Outcome Tracking of the Bank Group, attention needs to be given to two areas: System that covers investment operations. policy change and organizational effectiveness. Policy issues The importance of effective results frameworks and M&E is magnified where new delivery structures are being created to ensure quick feedback on what is working well and what is not, to help guide resources allocation, and to provide for accountability. M&E of new initiatives will need to be made more systematic. The GTFP and GTLP are not covered in IFC's M&E framework, and the results frameworks that were developed tended to favor financial over development targets, which creates incentives for development impact to be traded off for financial returns. Performance reporting is inconsistent across initiatives and tracking of investments is mainly taking place outside mainstream IFC M&E systems, with the excep- tion of DARP. This means that the development effectiveness of over $3 billion in IFC annual commitments, mainly trade finance, is currently not being systematically assessed. This gap will need to be addressed quickly. Photo courtesy of Scott Wallace/World Bank. 80 | The World Bank Group's Response to the Global Economic Crisis concern fiscal sustainability, public-private synergies, finan- Poverty and unemployment. As in previous crises, unem- cial sector reform, poverty and unemployment alleviation, ployment, one of the main causes of worsening poverty lev- and greener growth. In terms of organizational effectiveness, els, has lagged GDP growth. Monitoring of the poverty and preparedness, managing quality trade-offs, coordination, and social effects in this crisis has emerged in an ad-hoc man- a strong results focus will be crucial. ner, and higher-frequency tracking is needed going forward. A greater focus on LICs and inequities in MICs is also re- Policy Issues quired. Fiscal sustainability. Economic slowdown and fiscal ex- pansion have pushed debts and deficits in many advanced Environmentally sustainable growth. Long-term issues and some developing countries to unsustainably high lev- such as climate change and environmental problems are els. While fiscal or monetary stimulus may still be needed tougher to deal with in the face of a financial crisis, yet the in some countries, policies need to reestablish sustainable sustainability of global economic growth necessitates si- macroeconomic conditions. Growth will depend on, among multaneous actions. To be effective, such longer-term in- other things, the quality of public expenditures, where the vestments need to be factored into any crisis response: the World Bank can be valuable--for example, through more Bank Group's strong participation in scaling up public sector regular Public Expenditure Reviews. spending provides a unique opportunity. The Bank Group must build on the momentum in mobilizing funds for cli- Public-private synergies. A key policy task is to ensure a mate change mitigation to integrate greener development in smooth transition of demand from government to the pri- its mainstream activities. vate sector. At the same time, there is a widespread need to strengthen government capacities to regulate private sector Organizational Effectiveness activities effectively. The private sector, as the main engine of Preparedness. As crisis-related events continue to evolve, the growth, will need to be supported through policies, regula- premium on early warning, financial preparedness, and op- tion, and access to finance. These reforms should not be left erational readiness is at an all-time high. Stronger forecasting, for later stages of crisis response. with greater country/global connectivity, is crucial. Tools to optimize capital availability will be important, given that the Financial sector reform. Financial sector weaknesses persist capital headroom of the World Bank and IFC has been virtu- in the global economy and continue to pose downside risks ally used up and the recent capital increase provides only lim- to recovery in advanced and developing countries. There is a ited new headroom. From an operational standpoint, rebuild- pressing need to shift from emergency support to addressing ing Bank Group financial sector capacity is fundamental. the structural weaknesses exposed by the crisis. This would involve repairing or strengthening financial systems while Quality trade-offs. The risk that lending preparation (to reforming prudential policies. The Bank Group can help, but rebuild a project pipeline that has been depleted as part of it needs to rebuild its capacity. the crisis response) and supervision (of a now-larger stock Photo courtesy of Scott Wallace/World Bank. Lessons and Issues for the Future | 81 of cumulative commitments) may, under an essentially regional banks, and others, but the challenge remains to sus- flat administrative budget envelope, crowd out critical tain and deepen cooperation. Strong internal cooperation, to analytical and advisory work--with adverse consequences capitalize on unique linkages across public and private sector for the quality of future lending--needs to be carefully spaces, will also be important. managed. Focus on results. A sharp focus on results, which incorporates Coordination. The premium on partnership and coordi- longer-term structural change, is critical when Bank lending is nation is particularly high at times of market uncertainty. at an all-time high and concerns persist about the sustainability Moreover, financial and capacity constraints make coordi- of the global recovery. This situation--together with the greater nation with external partners--and the focus on selected focus than in the past of conditionality based on a few prior ac- areas where the Bank Group has comparative advantage-- tions, with country ownership--places a premium on ensuring imperative. A significant part of the Bank Group's response clear and measurable objectives, M&E, and Bank Group com- has taken place in the context of partnerships with the IMF, mitment to implement corrective actions. 82 | The World Bank Group's Response to the Global Economic Crisis Appendix Statistical Photo courtesy of Thomas Sennett/World Bank. Statistical Appendix Table A1a. World Bank: Total Commitments, Fiscal Years 2007­10 Table A1b. World Bank: Total Disbursements, Fiscal Years 2007­10 Table A2a. IBRD: Commitments by Region, Fiscal Years 2007­10 Table A2b. IDA: Commitments by Region, Fiscal Years 2007­10 Table A3a. IBRD: Disbursements by Region, Fiscal Years 2007­10 Table A3b. IDA: Disbursements by Region, Fiscal Years 2007­10 Table A4a. IBRD: Commitments by Top Borrowing Countries, Fiscal Years 2007­10 Table A4b. IDA: Commitments by Top Borrowing Countries, Fiscal Years 2007­10 Table A5a. IBRD: Disbursements by Top Borrowing Countries, Fiscal Years 2007­10 Table A5b. IDA: Disbursements by Top Borrowing Countries, Fiscal Years 2007­10 Table A6a. IBRD: Commitments by Sector, Fiscal Years 2007­10 Table A6b. IDA: Commitments by Sector, Fiscal Years 2007­10 Table A7a. IBRD: Disbursements by Sector, Fiscal Years 2007­10 Table A7b. IDA: Disbursements by Sector, Fiscal Years 2007­10 Table A8a. IBRD: Commitments by Lending Instrument Type, Fiscal Years 2007­10 Table A8b. IDA: Commitments by Lending Instrument Type, Fiscal Years 2007­10 Table A9a. IBRD: Disbursements by Lending Instrument Type, Fiscal Years 2007­10 Table A9b. IDA: Disbursements by Lending Instrument Type, Fiscal Years 2007­10 Table A10a. Crisis Severity and World Bank Response (Summary) Table A10b. World Bank Response in Most-Affected Countries Table A10c. World Bank Response in Moderately Affected Countries Table A10d. World Bank Response in Least-Affected Countries Table A11a. World Bank: ESW Delivered by Region, Fiscal Years 2007­10 Table A11b. World Bank: ESW and Lending by Region, Fiscal Years 2009­10 Table A12a. World Bank: ESW Delivered by Sector, Fiscal Years 2007­10 Table A12b. World Bank: ESW and Lending by Sector, Fiscal Years 2009­10 Table A13. World Bank: Bank Budget by Cost Category, Fiscal Years 2007­10 Table A14. Selected Development Policy Operations Approved in Fiscal Years 2009­10 (Quality-at-Entry Assessment) Statistical Appendix | 85 TABLE A1a World Bank: Total Commitments, Fiscal Years 2007­10 $ Billion Share in commitment (percent) Fiscal year Fiscal year 2007 2008 2009 2010 2007 2008 2009 2010 IBRD 12.8 13.5 32.9 44.2 52.0 55.0 70.0 75.2 IDA 11.9 11.2 14 14.5 48.0 45.0 30.0 24.8 World Bank 24.7 24.7 46.9 58.7 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. 70 60 50 US$ billion 40 30 20 10 0 2007 2008 2009 2010 Fiscal year IBRD IDA World Bank TABLE A1b World Bank: Total Disbursements, Fiscal Years 2007­10 $ Billion Share in disbursement (percent) Fiscal year Fiscal year 2007 2008 2009 2010 2007 2008 2009 2010 IBRD 11.1 10.5 18.6 28.9 56.0 53.0 67.0 71.7 IDA 8.6 9.2 9.2 11.5 44.0 47.0 33.0 28.5 World Bank 19.6 19.6 27.8 40.6 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. 45 40 35 30 US$ billion 25 20 15 10 5 0 2007 2008 2009 2010 Fiscal year IBRD IDA World Bank 86 | The World Bank Group's Response to the Global Economic Crisis TABLE A2a IBRD: Commitments by Region, Fiscal Years 2007­10 $ Billion Share In IBRD commitment (percent) Fiscal year Fiscal year Region 2007 2008 2009 2010 2007 2008 2009 2010 Sub-Saharan Africa 0 0 0.4 4.3 0 0 1 10 East Asia and the Pacific 2.8 2.7 6.9 5.9 22 20 21 13 Europe and Central Asia 3.3 3.7 9 10.2 26 28 27 23 Latin America and the Caribbean 4.4 4.4 13.8 13.7 34 32 42 31 Middle East and North Africa 0.7 1.2 1.6 3.5 5 9 5 8 South Asia 1.6 1.5 1.3 6.7 12 11 4 15 Total 12.8 13.5 32.9 44.2 100 100 100 100 Source: World Bank data, July 2010. TABLE A2b IDA: Commitments by Region, Fiscal Years 2007­10 $ Billion Share In IDA commitment (percent) Fiscal year Fiscal year Region 2007 2008 2009 2010 2007 2008 2009 2010 Sub-Saharan Africa 5.8 5.7 7.8 7.2 49 50 56 49 East Asia and the Pacific 1.2 1.8 1.2 1.7 10 16 9 11 Europe and Central Asia 0.4 0.5 0.4 0.6 4 4 3 4 Latin America and the Caribbean 0.2 0.3 0.2 0.2 2 3 1 2 Middle East and North Africa 0.2 0.3 0.2 0.2 2 2 1 1 South Asia 4 2.8 4.1 4.6 34 25 30 32 Total 11.9 11.2 14 14.5 100 100 100 100 Source: World Bank data, July 2010. Statistical Appendix | 87 TABLE A3a IBRD: Disbursements by Region, Fiscal Years 2007­10 $ Billion Share In IBRD disbursement (percent) Fiscal year Fiscal year Region 2007 2008 2009 2010 2007 2008 2009 2010 Sub-Saharan Africa 0 0 0.1 0.0 0.0 0.0 1.0 0.1 East Asia and the Pacific 2.4 2.4 3.3 4.1 21.0 23.0 18.0 14.1 Europe and Central Asia 2.5 2.7 4.9 7.6 22.0 26.0 26.0 26.4 Latin America and the Caribbean 3.5 3.2 7.9 11.6 32.0 31.0 42.0 40.1 Middle East and North Africa 1.5 1 1.2 2.1 13.0 9.0 7.0 7.3 South Asia 1.2 1.2 1.2 3.5 11.0 11.0 6.0 12.0 Total 11.1 10.5 18.6 28.9 100 100 100 100 Source: World Bank data, July 2010. TABLE A3b IDA: Disbursements by Region, Fiscal Years 2007­10 $ Billion Share In IDA disbursement (percent) Fiscal year Fiscal year Region 2007 2008 2009 2010 2007 2008 2009 2010 Sub-Saharan Africa 3.9 4.8 4.3 5.9 45.0 53.0 47.0 51.4 East Asia and the Pacific 0.9 1.1 1.3 1.6 10.0 12.0 14.0 14.1 Europe and Central Asia 0.5 0.5 0.5 0.5 6.0 6.0 5.0 4.7 Latin America and the Caribbean 0.2 0.2 0.2 0.2 2.0 2.0 2.0 1.9 Middle East and North Africa 0.2 0.1 0.2 0.2 2.0 1.0 2.0 1.6 South Asia 3 2.4 2.8 3.0 35.0 26.0 30.0 26.3 Total 8.6 9.2 9.2 11.5 100 100 100 100 Source: World Bank data, July 2010. 88 | The World Bank Group's Response to the Global Economic Crisis TABLE A4a IBRD: Commitments by Top Borrowing Countires, Fiscal Years 2007­10 Share in IBRD commitment $ Billion (percent) Fiscal year Fiscal year Region Country 2007 2008 2009 2010 2007 2008 2009 2010 East Asia and the Pacific Indonesia 0.8 0.9 4.2 3.0 6 6.8 12.8 6.8 China 1.6 1.5 2.4 1.4 12.8 11.2 7.2 3.2 Europe and Central Asia Turkey 1.2 1.2 2.1 3.0 9 8.9 6.3 6.8 Poland 0.2 0 2.6 1.3 1.4 0 7.7 3.0 Ukraine 0.2 0.7 0.9 0.5 1.2 5.1 2.7 1.0 Kazakhstan 0 0.1 2.1 1.1 0.2 1.1 6.5 2.4 Hungary 0 0 0 1.4 0 0 0 3.2 Latin America and the Caribbean Mexico 0 0.7 3.4 6.4 0.2 5.5 10.4 14.4 Brazil 0.3 1.9 3.6 3.7 2.2 14.2 11 8.5 Colombia 1.1 0.9 1.3 1.2 8.6 7 3.9 2.7 Argentina 1.7 0.1 1.8 0.6 13.6 0.8 5.6 1.4 Peru 0.4 0 1.4 0.4 3.3 0 4.2 0.8 South Asia India 1.5 1.3 1.3 6.7 11.7 9.8 3.9 15.1 13-country total 9 9.5 27 30.6 70.3 70.5 82.2 69.3 IBRD total 12.8 13.5 32.9 44.2 100 100 100 100.0 Source: World Bank data, July 2010. TABLE A4b IDA: Commitments by Top Borrowing Countires, Fiscal Years 2007­10 $ Billion Share in IDA commitment (percent) Fiscal year Fiscal year Region Country 2007 2008 2009 2010 2007 2008 2009 2010 Sub-Saharan Africa Ethiopia 0.6 0.7 1.1 0.9 5.5 6.3 8.2 6.1 Tanzania 0.4 0.5 0.6 0.9 3.6 4.4 4.4 6.4 Nigeria 0.8 0.4 1.8 0.9 6.3 3.5 12.6 6.1 Congo, Dem. Rep. of 0.3 0.2 0.4 0.5 2.8 2.0 2.5 3.2 Uganda 0.5 0.3 0.3 0.4 4.5 2.8 2.5 3.0 Ghana 0.2 0.3 0.6 0.3 1.7 2.7 3.9 2.2 Kenya 0.4 0.2 0.5 0.6 3.3 1.3 3.3 4.1 Africa, regional projects 0.7 0.5 0.6 0.7 5.9 4.6 4.3 4.8 East Asia and the Pacific Vietnam 0.7 1.2 1.1 1.4 6.0 10.6 8.2 9.8 South Asia India 2.3 0.8 1 2.6 18.9 7.5 6.8 17.7 Pakistan 0.9 0.4 1.6 0.3 7.4 3.3 11.5 2.1 Bangladesh 0.4 0.8 1.1 0.8 3.2 6.7 7.8 5.7 Sri Lanka 0.1 0.1 0.1 0.4 0.6 1.3 0.9 2.5 13-country total 8.3 6.4 10.8 10.7 69.9 57.0 77.0 73.6 IDA total 11.9 11.2 14 14.5 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. A5A. Statistical Appendix | 89 TABLE A5a IBRD: Disbursements by Top Borrowing Countries, Fiscal Years 2007­10 $ Billion Share in IBRD disbursement (percent) Fiscal year Fiscal year Region Country 2007 2008 2009 2010 2007 2008 2009 2010 East Asia and the Pacific Indonesia 0.7 0.9 1.3 2.1 6.3 8.8 7.2 7.1 China 1.3 1.3 1.6 1.3 11.4 12.2 8.5 4.5 Europe and Central Asia Turkey 1.3 1.3 1.7 3.0 12 11.9 9 10.3 Poland 0.2 0 1.4 1.5 1.5 0.3 7.8 5.0 Ukraine 0.1 0.4 0.6 0.5 0.9 3.9 3.3 1.7 Kazakhstan 0 0.1 0.1 0.2 0.4 0.5 0.4 0.6 Hungary 0 0 0 0 0 0 0 0.0 Latin America and the Caribbean Mexico 0.8 0.6 2.5 4.6 7.5 6.1 13.5 16.0 Brazil 0.8 0.7 1.8 2.6 7.5 7.1 9.6 9.1 Colombia 0.8 0.6 1.2 1.6 7.5 6.1 6.7 5.5 Argentina 0.5 0.4 0.8 0.9 4.1 3.4 4.1 3.0 Peru 0 0.3 0.3 0.5 0.3 2.5 1.6 1.6 South Asia India 1.1 1.1 1.1 3.4 9.5 10.7 6 11.7 13- country total 7.6 7.7 14.4 22.0 68.9 73.6 77.8 76.2 IBRD total 11.1 10.5 18.6 28.9 100 100 100 100.0 Source: World Bank data, July 2010. TABLE A5b IDA: Disbursements by Top Borrowing Countires, Fiscal Years 2007­10 $ Billion Share in IDA commitment (percent) Fiscal year Fiscal year Region Country 2007 2008 2009 2010 2007 2008 2009 2010 Sub-Saharan Africa Ethiopia 0.4 0.4 0.9 0.7 4.2 4.8 9.9 6.2 Tanzania 0.4 0.5 0.4 0.8 4.8 5.5 4.6 7.0 Nigeria 0.4 0.3 0.3 1.1 4.2 3.6 3.8 9.5 Congo, Dem. Rep. of 0.2 0.3 0.3 0.3 2.4 3.1 3.4 2.4 Uganda 0.4 0.2 0.3 0.3 4.4 1.7 3.3 2.9 Ghana 0.2 0.2 0.1 0.4 2.6 2.4 1.4 3.4 Kenya 0.1 0.2 0.1 0.2 0.7 1.8 1.6 1.8 Africa, regional projects 0.1 0.1 0.1 0.3 1.2 1 1.3 2.8 East Asia and the Pacific Vietnam 0.5 0.6 0.7 1.2 5.7 7.1 7.4 10.7 South Asia India 0.9 0.8 1.1 1.3 10.8 9.2 11.4 11.2 Pakistan 1 0.3 0.8 0.7 12.1 2.9 9.2 6.1 Bangladesh 0.6 0.7 0.4 0.4 7.3 8 4.1 3.3 Sri Lanka 0.2 0.1 1.1 0.2 1.8 1.3 1.2 1.9 13-country total 5.4 4.8 5.8 7.9 62.3 52.5 62.7 69.1 IDA total 8.6 9.2 9.2 11.5 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. A5A. 90 | The World Bank Group's Response to the Global Economic Crisis TABLE A6a IBRD: Commitments by Sector, Fiscal Years 2007­10 $ Billion Share in IBRD commitment (percent) Fiscal year Fiscal year Sector Board 2007 2008 2009 2010 2007 2008 2009 2010 Agriculture and Rural Development 1.5 0.4 1 1.5 12.0 3.0 3.0 3.4 Economic Policy 1.3 1.7 7.3 8.7 10.0 13.0 22.0 19.8 Environment 0.3 0.6 3.7 0.3 2.0 4.0 11.0 0.7 Financial and Private Sector 1.5 1.7 2.6 8.6 12.0 12.0 8.0 19.5 Development Infrastructurea 6 6.7 10.1 17.3 47.0 49.0 31.0 39.1 Public Sector Development 0.2 1.5 1.6 0.8 1.0 11.0 5.0 1.9 Social 2.1 1 6.7 6.9 17.0 7.0 20.0 15.6 Total 12.8 13.5 32.9 44.2 100.0 100.0 100.0 100.0 Source: World Bank data, April 2010. Note: Infrastructure includes Energy and Mining, Global Information and Communications Technologies, Transport, Urban and Water; Public Sector Development includes Financial Management, Procurement and Public Sector Governance; Social includes Education, Gender, Health Nutrition, and Population, Poverty Reduction, Social Development and Social Protection. TABLE A6b IDA: Commitments by Sector, Fiscal Years 2007­10 $ Billion Share in IDA commitment (percent) Fiscal year Fiscal year Sector Board 2007 2008 2009 2010 2007 2008 2009 2010 Agriculture and Rural Development 1.6 1.7 2.6 1.7 13.0 15.0 18.0 11.9 Economic Policy 0.6 1.9 1.7 1.0 5.0 17.0 12.0 6.5 Environment 0 0.1 0.2 0.3 0.0 1.0 1.0 1.9 Financial and Private Sector 0.4 0.2 0.3 1.0 3.0 2.0 2.0 7.2 Development Infrastructurea 4.2 4.3 4.4 5.8 36.0 38.0 32.0 40.0 Public Sector Development 0.5 0.6 0.8 0.6 4.0 6.0 5.0 3.8 Social 4.5 2.4 4 4.2 38.0 21.0 29.0 28.7 Total 11.9 11.2 14 14.5 100.0 100.0 100.0 100.0 Source: World Bank data, April 2010. Note: Infrastructure includes Energy and Mining, Global Information and Communications Technologies, Transport, Urban and Water; Public Sector Development includes Financial Management, Procurement and Public Sector Governance; Social includes Education, Gender, Health Nutrition, and Population, Poverty Reduction, Social Development and Social Protection. Statistical Appendix | 91 TABLE A7a IBRD: Disbursements by Sector, Fiscal Years 2007­10 $ Billion Share in IBRD disbursement (percent) Fiscal year Fiscal year Sector Board 2007 2008 2009 2010 2007 2008 2009 2010 Agriculture and Rural Development 1.0 0.9 0.7 0.7 8.8 8.9 3.6 2.5 Economic Policy 1.2 1.7 4.1 6.7 11.2 16.4 22.2 23.3 Environment 0.1 0.3 1.8 1.0 0.9 3.1 9.8 3.3 Financial and Private Sector 1.6 1.2 3.3 4.6 14.2 11.1 17.6 15.9 Development Infrastructurea 3.8 4.5 4.7 8.2 34.5 42.9 25.5 28.5 Public Sector Development 0.3 0.4 1.5 1.1 2.4 3.8 7.8 3.8 Social 3.1 1.4 2.5 6.6 28.0 13.7 13.5 22.7 Total 11.1 10.5 18.6 28.9 100.0 100.0 100.0 100.0 Source: World Bank data, April 2010. Note: Infrastructure includes Energy and Mining, Global Information and Communications Technologies, Transport, Urban and Water; Public Sector Development includes Financial Management, Procurement and Public Sector Governance; Social includes Education, Gender, Health Nutrition, and Population, Poverty Reduction, Social Development and Social Protection. TABLE A7b IDA: Disbursements by Sector, Fiscal Years 2007­10 $ Billion Share in IDA disbursement (percent) Fiscal year Fiscal year Sector Board 2007 2008 2009 2010 2007 2008 2009 2010 Agriculture and Rural Development 1.1 1.1 1.3 1.6 13.0 12.2 13.7 13.6 Economic Policy 0.6 1.7 1.3 1.2 6.7 18.5 14.2 10.3 Environment 0.1 0.1 0.1 0.1 0.9 0.9 1.1 0.9 Financial and Private Sector 0.4 0.5 0.6 1.0 4.3 5.2 6.5 8.7 Development Infrastructurea 2.4 2.7 2.8 3.0 27.8 29.0 30.3 26.5 Public Sector Development 0.7 0.5 0.6 1.0 7.9 5.8 6.5 9.2 Social 3.4 2.6 2.5 3.5 39.3 28.5 27.6 30.7 Total 8.6 9.2 9.2 11.4 100.0 100.0 100.0 100.0 Source: World Bank data, April 2010. Note: The above table does not include disbursements related to the HIPC initiative for Côte d'Ivoire. Disbursements were 16 and 27 million for fis- cal 2009 and 2010, respectively. Infrastructure includes Energy and Mining, Global Information and Communications Technologies, Transport, Urban and Water; Public Sector Development includes Financial Management, Procurement and Public Sector Governance; Social includes Education, Gender, Health Nutrition, and Population, Poverty Reduction, Social Development and Social Protection. 92 | The World Bank Group's Response to the Global Economic Crisis TABLE A8a IBRD: Commitments by Lending Instrument Type, Fiscal Years 2007­10 $ Billion Share in IBRD commitment (percent) Fiscal year Fiscal year Instrument type 2007 2008 2009 2010 2007 2008 2009 2010 Development policy lending 3.6 4.0 15.5 20.6 28.3 29.5 47.2 46.6 Investment lending 9.2 9.5 17.4 23.6 71.7 70.5 52.8 53.4 Total 12.8 13.5 32.9 44.2 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. TABLE A8b IDA: Commitments by Lending Instrument Type, Fiscal Years 2007­10 $ Billion Share in IDA commitment (percent) Fiscal year Fiscal year Instrument type 2007 2008 2009 2010 2007 2008 2009 2010 Development policy lending 2.6 2.7 2.8 2.4 22.2 23.8 20.2 16.3 Investment lending 9.2 8.6 11.2 12.2 77.8 76.2 79.8 83.7 Total 11.9 11.2 14.0 14.5 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. TABLE A9a IBRD: Disbursements by Lending Instrument Type, Fiscal Years 2007­10 $ Billion Share in IBRD disbursement (percent) Fiscal year Fiscal year Instrument type 2007 2008 2009 2010 2007 2008 2009 2010 Development policy lending 4.1 3.5 9.1 17.4 37.0 33.2 49.2 60.4 Investment lending 7.0 7.0 9.4 11.4 63.0 66.8 50.8 39.6 Total 11.1 10.5 18.6 28.9 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. TABLE A9b IDA: Disbursements by Lending Instrument Type, Fiscal Years 2007­10 $ Billion Share in IDA disbursement (percent) Fiscal year Fiscal year Instrument type 2007 2008 2009 2010 2007 2008 2009 2010 Development policy lending 2.4 2.8 1.9 3.2 28.0 30.7 20.3 28.2 Investment lending 6.2 6.3 7.3 8.2 72.0 69.3 79.7 71.6 Total 8.6 9.2 9.2 11.5 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. Note: The above table does not include disbursements related to the HIPC initiative for Côte d'Ivoire. Disbursements were 16 and 27 million for fiscal 2009 and 2010, respectively. Statistical Appendix | 93 TABLE A10a Crisis Severity and World Bank Response (Summary) Pre-crisis average Crisis average (fiscal 2007­08, (fiscal 2009­10, World Bank commitments $ billion) $ billion) Change (%) Most-affected countries 5.2 14.5 178.8 Moderately affected countries 11.2 24.2 116.1 Least-affected countries 8.3 14.1 69.9 World Bank 24.7 52.8 113.8 Pre-crisis average Crisis average Total disbursement (fiscal 2007­08) (fiscal 2009­10) Change (%) Most-affected countries 4.4 10.2 131.8 Moderately affected countries 7.9 14.5 83.5 Least-affected countries 7.0 9.2 31.4 World Bank 19.4 33.9 74.7 TABLE A10b World Bank Response in Most-Affected Countries Growth ratea Pre-crisis average, Crisis average, Region Country fiscal 2006­07 fiscal 2008­09 Growth rate change Botswana 4.96 ­1.44 ­6.40 Sub-Saharan Africa Angola 19.42 6.38 ­13.04 Seychelles 9.92 ­4.22 ­14.13 Mongolia 9.39 3.66 ­5.73 East Asia and the Pacific Cambodia 10.49 2.11 ­8.38 Solomon Islands 8.80 2.55 ­6.25 Turkey 5.78 ­2.04 ­7.82 Kazakhstan 9.80 2.18 ­7.62 Hungary 2.47 ­2.84 ­5.31 Ukraine 7.60 ­6.50 ­14.10 Croatia 5.11 ­1.73 ­6.83 Bulgaria 6.24 0.49 ­5.75 Georgia 10.86 ­0.84 ­11.70 Latvia 11.11 ­11.28 ­22.39 Europe and Central Asia Romania 7.10 0.11 ­6.99 Armenia 13.47 ­3.82 ­17.29 Azerbaijan 29.75 10.05 ­19.70 Bosnia and Herzegovina 6.38 1.04 ­5.34 Montenegro 9.65 ­0.07 ­9.72 Russian Federation 7.87 ­1.14 ­9.01 Mexico 4.14 ­2.52 ­6.66 Colombia 7.24 1.27 ­5.98 Costa Rica 8.36 0.87 ­7.49 Latin America and the Dominican Caribbean Republic 9.57 4.37 ­5.21 Honduras 6.43 1.05 ­5.38 Barbados 3.31 ­2.56 ­5.87 St. Lucia 3.14 ­2.24 ­5.38 Bhutan 13.03 5.66 ­7.37 South Asia Maldives 12.61 1.61 ­11.00 Total: Most-affected countries Note: Most-affected countries are those with a decline in growth rate of more than 5 percentage points a. IMF World Economic Outlook database, April 2010. b. World Bank data, July 2010. 94 | The World Bank Group's Response to the Global Economic Crisis IBRD/IDA commitmentsb IBRD/IDA disbursementsb Share of Crisis Pre-crisis Change in country in Pre-crisis average Change in Share of country average, Crisis average commitment commitment average fiscal disbursement in disbursement fiscal 2007­08 fiscal 2009­10 amount increase (%) fiscal 2007­08 2009­10 amount increase (%) 0 308 308 3.3 0 1 1 0.0 51 120 69 0.7 34 24 ­10 ­0.2 0 5 5 0.0 0 5 5 0.1 26 38 12 0.1 21 46 26 0.4 74 13 ­61 ­0.7 33 45 12 0.2 2 5 3 0.0 0 1 1 0.0 1,181 2,533 1,352 14.5 1,291 2,326 1,034 17.8 87 1,595 1,508 16.2 51 122 71 1.2 0 707 707 7.6 1 4 3 0.0 422 680 258 2.8 254 559 305 5.3 261 356 95 1.0 163 294 131 2.3 172 264 92 1.0 123 207 84 1.5 66 230 164 1.8 83 191 108 1.9 0 213 213 2.3 0 148 148 2.6 241 211 ­30 ­0.3 214 461 247 4.3 61 139 78 0.8 84 130 46 0.8 763 212 ­551 ­5.9 71 158 87 1.5 32 136 103 1.1 43 36 ­7 ­0.1 10 24 15 0.2 12 9 ­3 ­0.1 130 0 ­130 ­1.4 268 142 ­126 ­2.2 383 4,896 4,512 48.5 733 3,569 2,835 48.9 1,021 1,224 203 2.2 734 1,416 682 11.8 36 283 246 2.6 3 21 19 0.3 71 194 123 1.3 72 187 115 2.0 66 53 ­14 ­0.2 52 41 ­11 ­0.2 0 18 18 0.2 2 3 1 0.0 3 8 5 0.1 11 3 ­8 ­0.1 17 16 0 0.0 19 21 2 0.0 10 9 ­2 0.0 5 11 6 0.1 5,186 14,486 9,300 100.0 4,378 10,181 5,803 100.0 Statistical Appendix | 95 TABLE A10c World Bank Response in Moderately Affected Countries Growth ratea Pre-crisis average, Crisis average, Region Country fiscal 2006­07 2008­09 Growth rate change Africa, regional projects 6.69 3.83 ­2.87 Kenya 6.66 1.81 ­4.86 Liberia 8.61 5.86 ­2.76 Madagascar 5.63 1.02 ­4.61 Sierra Leone 6.86 4.77 ­2.09 Sub-Saharan Africa Cape Verde 9.30 4.99 ­4.31 Namibia 6.29 1.30 ­4.99 Mauritania 6.23 1.30 ­4.93 Eritrea 0.23 ­3.09 ­3.32 South Africa 5.55 0.95 ­4.60 China 12.31 9.14 ­3.17 Vietnam 8.34 5.75 ­2.59 East Asia and the Pacific Philippines 6.21 2.38 ­3.83 Thailand 5.04 0.09 ­4.95 Samoa 2.21 0.03 ­2.18 Poland 6.51 3.35 ­3.15 Serbia 6.06 1.33 ­4.73 Europe and Central Asia Belarus 9.32 5.11 ­4.21 Macedonia, FYR 4.90 2.05 ­2.85 Moldova 3.89 0.66 ­3.24 Brazil 5.02 2.48 ­2.55 Argentina 8.56 3.80 ­4.76 Peru 8.32 5.33 ­2.99 Guatemala 5.84 1.91 ­3.93 El Salvador 4.27 ­0.55 ­4.83 Latin America and the Jamaica 2.11 ­1.88 ­3.99 Caribbean Panama 10.32 6.56 ­3.76 Paraguay 5.55 0.64 ­4.91 Nicaragua 3.65 0.65 ­3.00 Chile 4.60 1.09 ­3.51 Grenada 1.30 ­2.73 ­4.03 Dominica 3.64 1.45 ­2.19 Middle East and North Jordan 8.44 5.25 ­3.19 Africa Tunisia 5.85 3.80 ­2.05 India 9.59 6.51 ­3.09 South Asia Pakistan 5.89 2.00 ­3.89 Sri Lanka 7.23 4.73 ­2.51 Total: Moderately affected countries Note: Moderately affected countries are those with a change in growth rate between ­2 and ­5 percentage points. a. IMF World Economic Outlook database, April 2010. b. World Bank data, July 2010. 96 | The World Bank Group's Response to the Global Economic Crisis IBRD/IDA commitmentsb IBRD/IDA disbursementsb Crisis Share of Crisis Share of Pre-crisis average, Change in country in Pre-crisis average, Change in country in average, fiscal commitment commitment average, fiscal disbursement disbursement fiscal 2007­08 2009­10 amount increase (%) fiscal 2007­08 2009­10 amount increase (%) 613 648 35 0.3 97 221 124 1.9 273 528 255 2.0 116 174 58 0.9 254 49 ­205 ­1.6 221 33 ­188 ­2.9 161 35 ­126 ­1.0 204 89 ­115 ­1.8 30 38 8 0.1 44 43 0 0.0 12 15 3 0.0 22 17 ­5 ­0.1 4 4 0 0.0 0 4 4 0.1 12 15 4 0.0 62 22 ­40 ­0.6 15 0 ­15 ­0.1 29 15 ­15 ­0.2 0 1,875 1,875 14.4 1 5 3 0.1 1,577 1,887 310 2.4 1,290 1,439 148 2.3 952 1,639 687 5.3 570 1,204 635 9.7 320 503 183 1.4 284 274 ­10 ­0.2 0 40 40 0.3 4 9 5 0.1 6 12 6 0.0 6 13 7 0.1 92 1,941 1,849 14.2 96 1,448 1352 20.7 117 326 209 1.6 44 154 111 1.7 8 214 206 1.6 8 120 112 1.7 100 46 ­54 ­0.4 40 59 19 0.3 37 47 11 0.1 35 32 ­3 0.0 1,099 3,674 2,575 19.8 786 2,209 1422 21.7 927 1,237 310 2.4 405 819 413 6.3 210 868 658 5.1 153 386 233 3.6 181 375 194 1.5 164 352 188 2.9 0 350 350 2.7 34 130 96 1.5 38 166 128 1.0 17 170 154 2.3 121 148 27 0.2 86 111 25 0.4 60 82 22 0.2 20 54 34 0.5 50 62 13 0.1 40 57 18 0.3 33 17 ­17 ­0.1 25 41 15 0.2 1 6 6 0.0 5 2 ­3 0.0 1 0 ­1 0.0 0 1 1 0.0 66 222 155 1.2 40 191 150 2.3 47 212 164 1.3 122 146 24 0.4 2,952 5,752 2,800 21.6 1,972 3,411 1438 22.0 765 955 190 1.5 759 862 103 1.6 106 244 137 1.1 137 167 30 0.5 11,237 24,227 12,989 100.0 7,940 14,484 6,544 100.0 Statistical Appendix | 97 TABLE A10d World Bank Response in Least-Affected Countries Growth ratea Pre-crisis average, Crisis average, Region Country fiscal 2006­07 fiscal 2008­09 Growth rate change Nigeria 6.59 5.81 ­0.78 Ethiopia 11.67 10.56 ­1.10 Tanzania 6.94 6.45 ­0.50 Ghana 6.05 5.39 ­0.66 Uganda 9.60 7.89 ­1.71 Congo, Dem. Rep. of 5.92 4.45 ­1.47 Mozambique 6.80 6.54 ­0.27 Burkina Faso 4.53 4.20 ­0.33 Rwanda 7.04 7.67 0.63 Mauritius 4.64 2.84 ­1.80 Senegal 3.61 1.94 ­1.67 Mali 5.15 4.69 ­0.47 Côte d'Ivoire 1.16 3.04 1.88 Burundi 4.35 4.00 ­0.35 Sub-Saharan Africa Niger 4.63 4.21 ­0.41 Benin 4.20 3.86 ­0.34 Zambia 6.21 5.98 ­0.23 Cameroon 3.24 2.42 ­0.82 Malawi 7.40 8.69 1.29 Togo 2.95 2.12 ­0.83 Lesotho 4.47 2.95 ­1.52 Congo, Rep. of 2.33 6.57 4.24 Central African Republic 3.75 1.85 ­1.90 Guinea-Bissau 1.27 3.24 1.97 Guinea 2.13 2.33 0.20 Gambia, The 6.43 5.34 ­1.09 São Tomé and Principe 6.34 4.90 ­1.44 Chad 0.17 ­1.01 ­1.18 Comoros 0.87 1.06 0.19 Indonesia 5.92 5.28 ­0.65 Lao PDR 8.24 7.69 ­0.56 East Asia and the Pacific Tonga 0.05 0.15 0.10 Papua New Guinea 4.72 5.60 0.87 Uzbekistan 8.40 8.55 0.15 Albania 5.72 5.32 ­0.40 Europe and Central Asia Kyrgyz Republic 5.80 5.35 ­0.45 Tajikistan 7.40 5.65 ­1.75 Kosovo 3.92 4.70 0.79 98 | The World Bank Group's Response to the Global Economic Crisis IBRD/IDA commitmentsb IBRD/IDA disbursementsb Pre-crisis Pre-crisis Change in Share of country average, Change in Share of country average, Crisis average, commitment in commitment fiscal Crisis average, disbursement in disbursement fiscal 2007­08 fiscal 2009­10 amount increase (%) 2007­08 fiscal 2009­10 amount increase (%) 570 1,325 755 12.9 342 719 377 17.6 683 1,018 334 5.7 399 815 416 19.4 465 774 309 5.3 460 614 153 7.2 256 432 176 3.0 224 260 36 1.7 425 393 ­33 ­0.6 267 317 50 2.3 276 407 131 2.2 245 299 55 2.6 145 210 65 1.1 235 201 ­34 ­1.6 124 205 81 1.4 162 195 34 1.6 96 160 64 1.1 124 128 4 0.2 30 119 89 1.5 31 55 24 1.1 113 182 70 1.2 124 112 ­13 ­0.6 124 183 60 1.0 129 104 ­25 ­1.1 278 178 ­100 ­1.7 159 197 38 1.8 100 101 1 0.0 86 77 ­8 ­0.4 67 60 ­7 ­0.1 87 50 ­37 ­1.7 89 84 ­5 ­0.1 74 67 ­7 ­0.3 46 53 7 0.1 63 41 ­22 ­1.0 102 65 ­37 ­0.6 43 33 ­10 ­0.5 86 94 8 0.1 61 100 39 1.8 96 41 ­55 ­0.9 82 18 ­64 ­3.0 24 28 4 0.1 14 23 9 0.4 38 23 ­15 ­0.3 16 15 0 0.0 54 11 ­43 ­0.7 45 18 ­26 ­1.2 5 10 5 0.1 13 12 ­1 0.0 16 5 ­11 ­0.2 31 9 ­22 ­1.0 8 9 1 0.0 9 12 3 0.2 3 2 ­1 0.0 3 5 2 0.1 13 10 ­3 0.0 21 15 ­6 ­0.3 3 4 2 0.0 4 2 ­2 ­0.1 1,227 3,606 2,379 40.8 1,084 2,013 929 43.4 27 75 48 0.8 55 38 ­16 ­0.8 0 3 3 0.0 3 2 ­1 ­0.1 41 13 ­28 ­0.5 11 13 2 0.1 41 87 45 0.8 35 31 ­4 ­0.2 72 42 ­30 ­0.5 50 40 ­9 ­0.4 34 35 2 0.0 49 32 ­17 ­0.8 26 42 17 0.3 33 40 7 0.3 15 10 ­5 ­0.1 7 7 0 0.0 (Table continues on the following page.) Statistical Appendix | 99 TABLE A10d World Bank Response in Least-Affected Countries (continued) Growth ratea Pre-crisis average, Crisis average, Region Country fiscal 2006­07 fiscal 2008­09 Growth rate change Uruguay 5.89 5.70 ­0.20 Latin America and the Haiti 2.75 1.85 ­0.90 Caribbean Bolivia 4.68 4.72 0.04 Ecuador 3.40 3.80 0.41 Egypt, Arab Rep. of 6.97 5.92 ­1.04 Morocco 5.23 5.39 0.16 Middle East and North Yemen, Republic of 3.25 3.76 0.50 Africa Iraq 3.85 6.86 3.01 Lebanon 4.04 9.00 4.96 Djibouti 4.95 5.40 0.45 Bangladesh 6.42 5.73 ­0.68 South Asia Nepal 3.35 5.01 1.65 Afghanistan 11.21 12.95 1.74 Total: Least-affected countries Note: Least-affected countries are those with a change in growth rate greater than ­2 percentage points. a. IMF World Economic Outlook database, April 2010. b. World Bank data, July 2010. TABLE A11a World Bank: ESW Delivered by Region, Fiscal Years 2007­10 2007 2008 2009 2010 Region Number of pieces of ESW delivered Sub-Saharan Africa 110 124 115 115 East Asia and the Pacific 87 62 68 88 Europe and Central Asia 108 89 75 81 Latin America and the Caribbean 66 60 31 49 Middle East and North Africa 55 48 42 48 South Asia 64 50 47 37 a Other 37 49 54 61 Total 527 482 432 479 Share of total (percent) Sub-Saharan Africa 20.9 25.7 26.6 24.0 East Asia and the Pacific 16.5 12.9 15.7 18.4 Europe and Central Asia 20.5 18.5 17.4 16.9 Latin America and the Caribbean 12.5 12.4 7.2 10.2 Middle East and North Africa 10.4 10.0 9.7 10.0 South Asia 12.1 10.4 10.9 7.7 Othera 7.0 10.2 12.5 12.7 Total 100.0 100.0 100.0 100.0 Source: World Bank data as of July 2010. a. Other = non-Regional ESW. 100 | The World Bank Group's Response to the Global Economic Crisis IBRD/IDA commitmentsb IBRD/IDA disbursementsb Pre-crisis Pre-crisis Change in Share of country average, Change in Share of country average, Crisis average, commitment in commitment fiscal Crisis average, disbursement in disbursement fiscal 2007­08 fiscal 2009­10 amount increase (%) 2007­08 fiscal 2009­10 amount increase (%) 110 215 105 1.8 106 248 142 6.6 49 81 32 0.5 22 51 29 1.3 74 15 ­59 ­1.0 19 32 13 0.6 63 0 ­63 ­1.1 9 1 ­8 ­0.4 509 1,513 1,004 17.2 456 743 288 13.4 275 431 156 2.7 304 292 ­12 ­0.6 102 185 83 1.4 130 127 ­3 ­0.1 137 125 ­12 ­0.2 0 169 169 7.9 50 35 ­15 ­0.3 99 25 ­74 ­3.4 3 8 5 0.1 11 7 ­4 ­0.2 566 962 396 6.8 680 375 ­305 ­14.2 241 246 5 0.1 78 152 74 3.4 281 198 ­83 ­1.4 254 236 ­17 ­0.8 8,273 14,107 5,834 103 7,047 9,189 2,141 100 TABLE A11b World Bank: ESW and Lending by Region, Fiscal Years 2009­10 ESW Lending Number of Number of pieces of ESW Bank budget cost approved Commitments Disbursements Region delivered ($ millions) projects ($ millions) ($ millions) Sub-Saharan Africa 230 39 218 19,640 10,357 East Asia and the Pacific 156 19 102 15,669 10,203 Europe and Central Asia 156 29 110 20,179 13,526 Latin America and the Caribbean 80 18 147 27,938 19,843 Middle East and North Africa 90 19 44 5,460 3,706 South Asia 84 16 93 16,763 10,469 Othera 115 21 Total 911 162 714 105,649 68,106 Share of total (percent) Sub-Saharan Africa 25.2 24.2 30.5 18.6 15.2 East Asia and the Pacific 17.1 12.0 14.3 14.8 15.0 Europe and Central Asia 17.1 18.1 15.4 19.1 19.9 Latin America and the Caribbean 8.8 11.2 20.6 26.4 29.1 Middle East and North Africa 9.9 11.7 6.2 5.2 5.4 South Asia 9.2 9.8 13.0 15.9 15.4 Othera 12.6 13.0 0.0 0.0 0.0 Total 100.0 100.0 100.0 100.0 100.0 Source: World Bank data, July 2010. a. Other = non-Regional ESW. Statistical Appendix | 101 TABLE A12a World Bank: ESW Delivered by Sector, Fiscal Years 2007­10 2007 2008 2009 2010 Sector Number of pieces of ESW delivered Agriculture and Rural Development 35 34 28 22 Economic Policy 90 86 77 112 Social 138 113 92 100 Infrastructure 81 58 60 60 Environment 23 22 16 24 Financial and Private Sector Development 85 104 102 92 Public Sector Development 74 64 57 67 Operational Services/Not Applicable 1 1 2 Total 527 482 432 479 Share of total (percent) Agriculture and rural development 6.6 7.1 6.5 4.6 Economic Policy 17.1 17.8 17.8 23 Social 26.2 23.4 21.3 21 Infrastructure 15.4 12.0 13.9 13 Environment 4.4 4.6 3.7 5 Financial and Private Sector Development 16.1 21.6 23.6 19 Public Sector Development 14.0 13.3 13.2 14 Operational Services/Not Applicable 0.2 0.2 0.0 0 Total 100.0 100.0 100.0 100.0 Source: World Bank data as of July 2010. Note: Infrastructure includes Energy and Mining, Global Information and Communications Technologies, Transport, Urban and Water; Public Sector Development includes Financial Management, Procurement and Public Sector Governance; Social includes Education, Gender, Health Nutrition, and Population, Poverty Reduction, Social Development and Social Protection. 102 | The World Bank Group's Response to the Global Economic Crisis TABLE A12b World Bank: ESW and Lending by Sector, Fiscal Years 2009­10 ESW Lending Number of Bank budget Number of Commitments Disbursements pieces of ESW cost approved ($ millions) ($ millions) Sector delivered ($ millions) projects Agriculture and Rural Development 50 10 104 6,823 4,231 Economic Policy 189 37 82 18,625 13,333 Environment 40 8 18 4,402 2,985 Financial and Private Sector Development 194 37 50 12,600 9,443 Infrastructure 120 16 252 37,625 18,763 Public Sector Development 124 21 30 3,748 4,193 Social 192 34 178 21,825 15,116 a Operational Services/Not applicable 2 0 43 Total 626 162 714 105,649 57,202 Share of total (percent) Agriculture and Rural Development 5.5 6.0 14.6 6.5 6.2 Economic Policy 20.7 22.8 11.5 17.6 19.6 Environment 4.4 4.7 2.5 4.2 4.4 Financial and Private Sector Development 21.3 22.6 7.0 11.9 13.9 Infrastructure 13.2 10.2 35.3 35.6 27.6 Public Sector Development 13.6 12.8 4.2 3.5 6.2 Social 21.1 20.9 24.9 20.7 22.2 Operational Services/Not applicable 0.2 0.1 0.0 0.0 0.1 Total 100.0 100.0 100.0 100.0 100.0 Source: World Bank data as of July 2010. Note: Infrastructure includes Energy and Mining, Global Information and Communications Technologies, Transport, Urban and Water; Public Sector Development includes Financial Management, Procurement and Public Sector Governance; Social includes Education, Gender, Health Nutrition, and Population, Poverty Reduction, Social Development and Social Protection.. a. Include disbursements related to the HIPC initiative for Côte d'Ivoire. Disbursements were 16 and 17 million for fiscal 2009 and 2010, respec- tively. Statistical Appendix | 103 TABLE A13 World Bank: Bank Budget by Cost Category, Fiscal Years 2007­10 Supervision Lending AAA Other Country services Fiscal year $ Millions 2000 159 124 108 65 456 2001 136 103 89 75 402 2002 152 123 133 85 493 2003 160 120 155 91 526 2004 167 156 160 106 589 2005 178 150 161 100 590 2006 190 155 171 104 619 2007 199 149 164 105 616 2008 217 148 187 105 658 2009 230 152 198 105 685 2010 252 157 207 110 725 Share of total (percent) 2000 34.8 27.3 23.6 14.2 100.0 2001 33.9 25.5 22.1 18.5 100.0 2002 30.9 25.0 26.9 17.2 100.0 2003 30.5 22.9 29.4 17.3 100.0 2004 28.4 26.5 27.1 18.0 100.0 2005 30.2 25.5 27.4 17.0 100.0 2006 30.7 25.0 27.6 16.7 100.0 2007 32.2 24.2 26.5 17.0 100.0 2008 33.0 22.5 28.5 16.0 100.0 2009 33.6 22.1 28.9 15.4 100.0 2010 34.7 21.6 28.5 15.2 100.0 Source: World Bank data as of July 2010. 104 | The World Bank Group's Response to the Global Economic Crisis TABLE A14 World Bank: Bank Budget by Cost Category, Fiscal Years 2007­10 Commitments Disbursements Percent Country/amount DPO ($ millions) ($ millions) disbursed Bangladesh Food Crisis DSC; Project ID: P112761; Approval Date: (130 million) 10/28/08; Comm. Amt: 130m 130.0 123.6 95 Brazil (3,081 million) 1st Prog. DPL for Sust. Env Mgmt; Project ID: P095205; Approval Date: 3/5/09; Comm. Amt: 1,300 m 1,300.0 800.0 62 RGS Fiscal Sustainability DPL; Project ID: P106767; Approval Date: 7/31/08; Comm. Amt: 1,100m 1,100.0 650.0 59 ALAGOAS Fiscal & Public Mgmt Reform; Project ID: P103770; Approval Date: 12/17/09; Comm. Amt: 195m 195.5 195.5 100 Rio State DPL; Project ID: P117244; Approval Date: 2/2/10; Comm. Amt: 485m 485.0 485.0 100 Colombia 3rd Sust. Dev DPL; Project ID: P101301; Approval Date: (1,400 million) 12/18/08; Comm. Amt: 450m 450.0 450.0 100 Disaster Risk Mgmt CAT DDO; Project ID: P113084; Approval Date: 2/18/08; Comm. Amt: 150m 150.0 0.0 0 Social DPL; Project ID: P106708; Approval Date: 2/23/10; Comm. Amt: 500m 500.0 500.0 100 Finance and Private Sector Dev; Project ID: P116088; Approval Date: 8/4/09; Comm. Amt: 300m 300.0 300.0 100 Georgia Supplemental Credit for PRSO IV; Project ID: P114167; (125 million) Approval Date: 10/2/08; Comm. Amt: 40m 40.0 37.0 93 DPO ­1; Project ID: P112700; Approval Date: 7/2/09; Comm. Amt: 85m 85.0 89.1 105 Hungary Financial Sector Stability Loan; Project ID: P114991; (1,413 million) Approval Date: 9/22/09; Comm. Amt: 1,413m 1,413.2 0.0 0 India (2,000 million) Banking Sector Support Loan; Project ID: P116020; Approval Date: 9/22/09; Comm. Amt: 2,000m 2,000.0 2,000.0 100 Indonesia Fifth Development Policy Loan; Project ID: P110191; (3,950 million) Approval Date: 12/9/08; Comm. Amt: 750m 750.0 750.0 100 Second Infrastructure DPL (IDPL 2); Project ID: P111905; Approval Date: 12/9/08; Comm. Amt: 200m 200.0 200.0 100 Public Expend. Supp. Facility (DPL-DDO); Project ID: P115199; Approval Date: 3/3/09; Comm. Amt: 2,000m 2,000.0 5.0 0 Sixth Development Policy Loan; Project ID: P113638; Approval Date: 9/24/09; Comm. Amt: 750m 750.0 750.0 100 Third Infrastructure DPL (IDPL3); Project ID: P115102; Approval Date: 9/24/09; Comm. Amt: 250m 250.0 250.0 100 Jordan (300 million) Recovery Under Global Uncertainty DPL; Project ID: P117023; Approval Date: 11/19/09; Comm. Amt: 300m 300.0 300.0 100 Kazakhstan Development Policy Loan; Project ID: P119856; (1,000 million) Approval Date: 5/25/2010; Comm. Amt: 1,000m 1,000.0 0.0 0 Mauritius Third Trade and Competitiveness DPL; Project ID: (150 million) P112369; Approval Date: 3/31/09; Comm. Amt: 100m 100.0 107.8 108 Fourth Trade and Competitiveness DPL; Project ID: P116608; Approval Date: 11/12/09; Comm. Amt: 50m 50.0 0.1 0 Mexico Environmental Sustainability DPL; Project ID: P095510; (3,709 million) Approval Date: 10/2/08; Comm. Amt: 301m 300.8 300.8 100 Supplement to Env. Sustain. DPL; Project ID: P115101; Approval Date: 12/18/08; Comm. Amt: 401m 401.0 401.0 100 Framework for Green Growth DPL; Project ID: P115608; Approval Date: 10/20/09; Comm. Amt: 1,504m 1,503.8 1,503.8 100 Economic Policies DPL; Project ID: P118070; Approval Date: 11/24/09; Comm. Amt: 1,504m 1,503.8 1,503.8 100 (Table continues on the following page.) Statistical Appendix | 105 TABLE A14 World Bank: Bank Budget by Cost Category, Fiscal Years 2007­10 (continued) Commitments Disbursements Percent Country/amount DPO ($ millions) ($ millions) disbursed Nigeria Fin Sec + Pub Fin Mgmt DPC; Project ID: P117088; Ap- 500.0 507.5 102 (500 million) proval Date: 7/28/09; Comm. Amt: 500m Peru (1,560 million) 2nd Results & Accnt. (REACT) DPL/DDO; Project ID: P101177; Approval Date: 4/9/09; Comm. Amt: 330m 330.0 20.0 6 First Prog. Environ DPL/DDO; Project ID: P101471; Approval Date: 2/17/09; Comm. Amt: 330m 330.0 20.0 6 2nd Prog. Env DPL; Project ID: P116152; Approval Date: 12/8/09; Comm. Amt: 50m 50.0 50.0 100 2nd Prg Fiscal Mgmt & Comp. DPL/DDO; Project ID: P101590; Approval Date: 8/5/08; Comm. Amt: 370m 370.0 220.0 59 Suppl 2nd Prog Fisc. Mgmt & Comp DPL; Project ID: P115120; Approval Date: 12/18/08; Comm. Amt: 330m 330.0 150.0 0 3rd Prog Fiscal Mgmt DPL; Project ID: P106720; Approval Date: 11/12/09; Comm. Amt: 150m 150.0 100 Poland Development Policy Loan [Public Finance Management, (3,882 million) Employment, and Private Sector Development Pro- grammatic Policy Loan]; Project ID: P112765; Approval Date: 12/22/08; Comm. Amt: 1,250m 1,250.0 1,359.2 109 Empl. Entrepreneurship & HCDP DPL [DPL2]; Project ID: P116125; Approval Date: 6/30/2009; Comm. Amt: 1,300m 1,300.2 1,431.0 110 Empl. Entrepreneurship & HCDP DPL [DPL3]; Project ID: P117666; Approval Date: 6/17/2010; Comm. Amt: 1,331m 1,331.3 0.0 0 Turkey CEDPL 2 [2nd Competitiveness and Employment DPL]; (2,600 million) Project ID: P096840; Approval Date: 12/16/08; Comm. Amt: 500m 500.0 438.4 88 Programmatic Electricity Sector DPL ; Project ID: P110643; Approval Date: 6/11/09; Comm. Amt: 800m 800.0 773.8 97 REGE DPL [Restoring Equitable Growth and Emploment Programmatic DPL]; Project ID: P112495; Approval Date: 3/23/10; Comm. Amt: 1,300m 1,300.0 1,260.2 97 Ukraine Ukraine DPL 3; Project ID: P107365; Approval Date: (900 million) 12/22/08; Comm. Amt: 500m 500.0 500.0 100 Programmatic Financial Rehab. DPL 1; Project ID: P115143; Approval Date: 9/17/09; Comm. Amt: 400m 400.0 400.0 100 Vietnam Higher Education Dev. Pol. Prog. 1st Operation; Project (1,315 million) ID: P104694; Approval Date: 6/23/09; Comm. Amt: 50m 50.0 52.4 105 Second Program 135 Phase 2 Support; Project ID: P107062; Approval Date: 5/21/09; Comm. Amt: 100m 100.0 107.2 107 PRSC 8; Project ID: P111164; Approval Date: 6/25/09; Comm. Amt: 350m 350.0 373.3 107 Power Sector Reform DPO; Project ID: P115874; Approval Date: 4/6/10; Comm. Amt: 315m 315.4 0.0 0 Public Inv. Reform 1; Project ID: P117723; Approval Date: 12/22/09; Comm. Amt: 500m 500.0 500.0 100 Total 28,014.82 19,865.4 Source: World Bank data as of July 2010. 106 | The World Bank Group's Response to the Global Economic Crisis Endnotes Chapter 1 5. Measured in real terms, as shown in figure 3.2, fiscal year 2009 fell short of 1999 commitments and disbursements, but 1. A real-time evaluation is carried out while a program is in 2010 exceeded them. full implementation and feeds back findings to the program 6. See especially box 3.2. for immediate use. See UNICEF 2003. 7. For the historical discussion, the chapter treats adjustment 2. Formative evaluation is a method of judging the worth lending as the equivalent of development policy lending, of a program while the program activities are emerging or which replaced it in fiscal 2004 as the Bank's primary quick- evolving. Contrast with summative evaluation methods, disbursing policy support instrument. which involve judging the worth of a program at the end of 8. Based on a classification of countries as follows: the program activities. Most­affected: growth decline of 5 percentage points or 3. The 11 countries are Bangladesh, Colombia, Georgia, more Hungary, Indonesia, Jordan, Mauritius, Mexico, Nigeria, Moderately affected: growth decline of 2­5 percentage Ukraine, and Vietnam. points Chapter 2 Least­affected: growth decline of 2 percentage points or less. 1. Bear Stearns was later acquired by JP Morgan Chase, Mer- 9. Note that the fiscal 2002 spike in DPO commitment and rill Lynch by Bank of America. disbursement shares was more about very low levels of in- 2. Especially countries with high levels of migration to the vestment lending that year than about high levels of DPOs. United States, such as Mexico. 10. Two other DPOs (financial sector loans to Hungary and 3. The underlying data and projections in this section are Latvia) were extended on Special Development Policy Loan taken from the latest edition of the IMF's World Economic (DPL) terms, but were not approved as Special DPLs by the Outlook (April 2010). Board. The new financial terms for Special Development Policy Loans, approved by the Board on September 1, 2009, Chapter 3 include a grace period of 3-5 years with a final maturity of 1. In April 2010, the Development Committee endorsed 5-10 years; a minimum fixed spread over LIBOR of 200 basis an $86 billion capital increase for IBRD and a $200 million points; and a front-end fee of 100 basis points. For further capital increase for IFC (plus consideration of a long-term details, see World Bank Response to Financial Crisis: The hybrid instrument as a form of contingent capital and earn- Special Development Policy Lending Option, Report No. ings retention for a crisis reserve), thereby further enhancing 49703, Operations Policy and Country Services and Corpo- the capacity of each to address this and subsequent crises. rate Finance and Risk Management, World Bank. See Development Committee Communiqué, April 25, 2010 11. See, for example, World Bank 2009f, paragraphs 4 and (Development Committee 2010). 18. See also Development Committee 2009a,b. Both say: 2. IFC does, however, tend to adjust spreads downward "The World Bank Group remains a premier source of de- quicker than upward. This is because loan pricing bench- velopment knowledge in a wide range of areas. Through ca- marks in IFC's client countries are much more readily avail- pacity building, policy advice, and technical assistance, the able in a high liquidity market environment than in a low World Bank Group has scaled up the dissemination of its de- liquidity one, when access to finance may be closed and velopment knowledge to assist developing countries assess benchmarks hard to ascertain. As a result, IFC's loan pricing the social and structural sources of vulnerability, address may lag market spread increases during crisis periods. underlying policy and institutional weaknesses, as well as re- 3. Adjustments were made as part of IBRD's annual loan spond to and manage the consequences of the crises. In this pricing review. context, the Bank has a proven track record of assisting de- 4. In MIGA's case, "MIGA response" is measured by the vol- veloping countries to design and scale up sustainable safety ume of new guarantees issued only. nets. Diagnostic work, guidance notes, and toolkits are also Endnotes | 107 underway in areas such as macroeconomic vulnerability, fis- 2009) and London (August 17, 2009). http://www.de- cal and debt sustainability and management strategies, safety velopment-finance.org/en/news/205-g20-consults-lics nets and policy options for dealing with the poverty and dis- .html tributional impacts of the crisis, microfinance and housing 21. IFC's leverage ratio--outstanding borrowings and guar- finance, and the impact of financial crisis on infrastructure antees in relation to the sum of subscribed capital and re- and PPI/PPP projects." tained earnings--also remained well within the limit of 4:1 12. See, for example, World Bank 2009f, paragraphs 4 and prescribed by IFC's financial policies. This ratio changed 18. from 1.4:1 in June 2008 to 2.1:1 in June 2009. 13. See World Bank 2008b. It noted that one important les- 22. Also responsible for the IFC African, Latin American, son from experience is that the short-term responses to a and Caribbean Fund (ALAC Fund), which was established as crisis--macroeconomic stabilization, trade policies, finan- part of the Sovereign Funds Initiative (SFI Sovereign Funds cial sector policies, and social protection--cannot ignore Initiative. ALAC has committed funding of $800 million, longer-term implications for both economic development $600 million from sovereign and pension fund investors and and vulnerability to future crises. $200 million from IFC). 14. See Klein 2008, a speech delivered at the Munich Finan- 23. Defined as having a market share of greater than 7 per- cial Summit, and Djankov and Angelov 2009, which focused cent, measured by claims on the private sector. The mini- on taxation issues using Bulgaria, as examples. mum investment per bank is $15 million, with a stake of 15. Mexico's pre-crisis Country Partnership Strategy of at least 10 percent (or 5 percent where the market share is March 2008 had envisaged a limited lending program an- greater than 20 percent. chored in one large multisector DPL and advisory services, 24. A separate platform for coordinating IFIs' mobilization both Bank-financed AAA and fee-based. As the crisis un- of funding for investment and advisory services for the Ca- folded and the program changed, the AAA and fee-based ribbean, including Haiti, was launched in mid-2010. The services were used to develop programs for Bank financial initiative will support reconstruction in Haiti and help ad- support. The cited fee-based services include analytical work dress the impact of the financial crisis in the region. Funding to help a client develop new housing finance products, such partners are CDB, EIB, FMO, and IFC. as housing microfinance, targeted subsidies, and so on. They 25. Separately, in February 2010, IFC signed a memorandum also include poverty and nutrition maps, used by the Minis- of understanding alongside an AfDB-led group of 7 other try of Social Development to improve the targeting of social DFIs, including DEG, EIB, IDC, DBSA, FMO, and Proparco, programs such as Oportunidades' nutrition component. covering cofinancing of investment projects in Africa. 16. Their forecasts--and those of the EIU and the other 26. IFC also took a conservative approach to administra- forecasters--fell below ­2 percent by the spring, before end- tive expenses, with the introduction of a cross-department ing the year with forecasts in the ­2.2 to ­2.3 percent range. "productivity tax" of 3 percent, a hiring freeze, and a sus- (Current estimates of the global growth rate for 2009 are in pension of IFC's variable pay programs, covering individual, the ­2.0 to ­2.2 percent range.) team, and corporate performance awards (which was lifted 17. One such all-day meeting took place immediately after in April 2010). the Annual Meetings, on October 15, 2008, where Justin Lin 27. The number of projects did increase from 372 to 447, re- and Danny Leipziger gave presentations about the crisis and flecting smaller average project size than in previous years. the substantive response. Since then, there have been three 28. Trade finance transactions require a capital allocation of more such meetings, which have provided important oppor- 11 percent of committed funds, as opposed to 22 percent for tunities for learning and cross-fertilization. a loan. Also, the capital allocation is only necessary once the 18. For the IBRD, additional financing operations aver- trade line has been used, not in the event it is not drawn aged less than 2 percent per annum in the fiscal 2001­06 down. period, and 15 percent from fiscal 2007 to 2010. For IDA, 29. A third source of funds is client contributions, which ac- the corresponding percentages are 11 and 27 percent. counted for 6 percent of funding in fiscal 2009. 19. G-20 Chair Consultations of LICs on Flexibility and Adapt- 30. This action directly picks up recommendations made in ability of IFIs in Freetown (August 14, 2009) and London IEG 2009b. (August 17, 2009). http://www.development-finance.org/en/ news/205-g20-consults-lics.html Chapter 4 20. G-20 Chair Consultations of LICs on Flex- 1. The Financial Sector Stability Forum does not cover other ibility and Adaptability of IFIs in Freetown (August 14, systemic risks, such as debt or corporate distress. 108 | The World Bank Group's Response to the Global Economic Crisis 2. On January 28, 2010, the Executive Board held an infor- capital was increased by 50 percent in 2010, to 30 billion mal meeting to review Bank instruments. The introduction from 20 billion, via a temporary increase in callable capital of a countercyclical DPL operation for situations when fi- of 9 billion and a transfer from reserves to paid-in capital nancing is necessary and the key objective is protection and of 1 billion. Meanwhile, Proparco received a 300 million maintenance of key public services was discussed, as were increase in June 2008. modifications to the Special Development Policy Lending 12. This mirrors the debate in the early 2000s about how best introduced during the East Asian crisis. to reach SMEs. The conclusion of the debate was that IFC 3. The purpose of the DPL-DDO has recently been defined could reach more SMEs by working through financial inter- as an instrument that helps the borrower address anticipated mediaries who on-lend to SMEs and through large compa- financing needs by allowing the borrower to draw on the nies that support SMEs through supply-chain linkages. loan at any time during a defined drawdown period (renew- 13. Awards have included 2009 Trade Finance Deal of the able for up to six years). Year and a Finance Asia Achievement Award. 4. The fact that the Bank operation was delayed and ulti- 14. Mechanisms to manage potential conflicts include: (i) mately not disbursed does not alter the fact that all parties That IFC co-invests in AMC-managed funds and through wanted to work together at the time. joint investments; (ii) the fund manager has the capacity to 5. Over $1 billion in fiscal 2009, compared with equity write- accept or reject an investment offer by IFC; (iii) the establish- downs in fiscal 2008 and 2007 of $140 million and $40 mil- ment of procedures to handle conflicts of interest, including lion respectively. that the advisory board of each fund (comprised of third party 6. The total value of write-downs may, as IFC management investors only) reviews conflicts of interest situations that are acknowledges, have been exacerbated by IFC holding equity brought to them prior to the related fund's investment deci- longer than it might have done during the boom years. Early sion; (iv) the AMC fund management team for each fund attention to global risks beyond IFC's two country stress test owes its fiduciary responsibility to the fund and is tasked with scenarios could have been helpful, as well as better incentives making independent investment decisions on each invest- and mechanisms for IFC staff to make equity sales. ment opportunity. However, these measures may together be 7. Between fiscal years 2007 and 2009, investments in other insufficient to alleviate the perception of conflict of interest. Central American countries increased from $77 million to 15. Separately, IFC began syndicating parallel loans to IFIs $823 million. (predominantly DFIs) in 2009. 8. IFC has also supported IDA countries in the crisis period 16. Pricing is also an issue in direct operations, in that IFC through a $450 million grant contribution to IDA in fiscal requires full repayment of costs by clients in few of these op- 2009. IFC contributed $500 million to IDA in fiscal 2010. erations. In effect, IFC is offering a subsidy to investment cli- 9. IFC pricing increased during the crisis period, but gener- ents for the provision of private benefits (which runs counter ally at a slower pace than the market. Between fiscal years to the advisory services pricing policy, which calls for sub- 2008 and 2009, IFC trade finance fees increased on average sidy only where there are distinct public benefits, and the by 50 basis points (33 percent). This compares with doubling subsidy could distort the market). or tripling of the cost of lines of trade credit in some emerg- 17. For the period from October 2008, when the crisis inten- ing countries, including Argentina, Bangladesh, China, Pak- sified, to March 2010 where data are available. istan, and Turkey, which accordingly had a short-term com- 18. See Proparco annual reports of 2007, 2008, and 2009. petitive advantage over other providers. See International 19. GTLP, meanwhile, has a target for only 15 percent of sup- Chamber of Commerce 2010. ported trade volume to be in IDA. 10. The number of deals only fell by one in 2009, but average 20. Advisory services crisis operations are individually moni- project size dropped by about half. tored through regular monitoring and evaluation systems. 11. In 2008, the EIB Board of Governors brought forward the 21. See also IEG 2010, p. 8, paragraphs 19­22. capital increase previously envisaged for 2010, raising EIB's 22. This action directly picks up recommendations made in subscribed capital by 67 billion to 232 billion. EBRD's IEG 2009b. Endnotes | 109 References Development Committee. 2010. Development Committee IEO (Independent Evaluation Office), IMF. 2010. "IMF Communiqué, April 25. World Bank and IMF, Washing- Performance in the Run-up to the Current Financial ton, DC. and Economic Crisis." Issues Paper for and Evaluation ------. 2009a. 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References | 111 Photographs Cover Child eating porridge from a food bank, Lukula, Tanzania x People looking for useful items in garbage landfill, Mexico. xii Woman coal miner outside mine, Colombia. xv Maputo harbor cranes, workers offloading rice imports, Mozambique. xix Elderly woman, Mexico. 1 View of an alleyway, India. 7 Mother and child, Madagascar. 12 Street scene, India. 17 Woman counting money at Proshika Credit Group meeting, Bangladesh. 22 Man working the fields, Ethiopia. 34 Port activity, Mexico. 45 Miner waiting to enter the shaft of the Glubokya mine, Ukraine. 47 Rural laborer with cargo of firewood, Colombia. 56 Group of miners entering shaft at Glubokya mine, Ukraine. 75 City viewed through ruins, Jordan. 77 Teenagers from the neighborhood in a secluded corner, Tbilisi, Georgia. 80 Elderly Bulgarian couple out for a ride in the countryside, northern Bulgaria. 81 Roma men scavenge steel rebar from the rubble of a looted sugar factory, Lom, Bulgaria. 83 Transfer of cargo, Bangladesh. 112 | The World Bank Group's Response to the Global Economic Crisis Recent IEG Publications Annual Review of Development Effectiveness 2009: Achieving Sustainable Development Addressing the Challenges of Globalization: An Independent Evaluation of the World Bank's Approach to Global Programs Assessing World Bank Support for Trade, 1987­2004: An IEG Evaluation Books, Building, and Learning Outcomes: An Impact Evaluation of World Bank Support to Basic Education in Ghana Bridging Troubled Waters: Assessing the World Bank Water Resources Strategy Climate Change and the World Bank Group--Phase I: An Evaluation of World Bank Win-Win energy Policy Reforms Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative A Decade of Action in Transport: An Evaluation of World Bank Assistance to the Transport Sector, 1995­2005 The Development Potential of Regional Programs: An Evaluation of World Bank Support of Multicountry Operations Development Results in Middle-Income Countries: An Evaluation of World Bank Support Doing Business: An Independent Evaluation--Taking the Measure of the World Bank­IFC Doing Business Indicators Egypt: Positive Results from Knowledge Sharing and Modest Lending--An IEG Country Assistance Evaluation 1999¬­2007 Engaging with Fragile States: An IEG Review of World Bank Support to Low-Income Countries Under Stress Environmental Sustainability: An Evaluation of World Bank Group Support Evaluation of World Bank Assistance to Pacific Member Countries, 1992­2002 Extractive Industries and Sustainable Development: An Evaluation of World Bank Group Experience Financial Sector Assessment Program: IEG Review of the Joint World Bank and IMF Initiative From Schooling Access to Learning Outcomes: An Unfinished Agenda--An Evaluation of World Bank Support to Primary Education Hazards of Nature, Risks to Development: An IEG Evaluation of World Bank Assistance for Natural Disasters How to Build M&E Systems to Support Better Government IEG Review of World Bank Assistance for Financial Sector Reform An Impact Evaluation of India's Second and Third Andhra Pradesh Irrigation Projects: A Case of Poverty Reduction with Low Economic Returns Improving Effectiveness and Outcomes for the Poor in Health, Nutrition, and Population Improving the Lives of the Poor through Investment in Cities Improving Municipal Management for Cities to Succeed: An IEG Special Study Improving the World Bank's Development Assistance: What Does Evaluation Show: Maintaining Momentum to 2015: An Impact Evaluation of Interventions to Improve Maternal and Child Health and Nutrition Outcomes in Bangladesh New Renewable Energy: A Review of the World Bank's Assistance Pakistan: An Evaluation of the World Bank's Assistance Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance The Poverty Reduction Strategy Initiative: An Independent Evaluation of the World Bank's Support Through 2003 The Poverty Reduction Strategy Initiative: Findings from 10 Country Case Studies of World Bank and IMF Support Power for Development: A Review of the World Bank Group's Experience with Private Participation in the Electricity Sector Public Sector Reform: What Works and Why? An IEG Evaluation of World Bank Support Small States: Making the Most of Development Assistance--A Synthesis of World Bank Findings Social Funds: Assessing Effectiveness Sourcebook for Evaluating Global and Regional Partnership Programs Using Knowledge to Improve Development Effectiveness: An Evaluation of World Bank Economic and Sector Work and Technical Assistance, 2000­2006 Using Training to Build Capacity for Development: An Evaluation of the World Bank's Project-Based and WBI Training The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits--An IEG Impact Evaluation World Bank Assistance to Agriculture in Sub-Saharan Africa: An IEG Review World Bank Assistance to the Financial Sector: A Synthesis of IEG Evaluations World Bank Group Guarantee Instruments 1990­2007: An Independent Evaluation The World Bank in Turkey: 1993­2004--An IEG Country Assistance Evaluation World Bank Engagement at the State Level: The Cases of Brazil, India, Nigeria, and Russia All IEG evaluations are available, in whole or in part, in languages other than English. For our multilingual section, please visit http://www.worldbank.org/ieg. ISBN 978-0-8213-8665-1 SKU 18665