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Global econ crisis-full

  1. 1. PHASE 1 The World Bank Group’s Response to the Global Economic Crisis
  2. 2. The World Bank GroupWORKING FOR A WORLD FREEOF POVERTYT 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 forlasting results and to help people help themselves andtheir environment by providing resources, sharing knowl-edge, building capacity, and forging partnerships in thepublic 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.
  3. 3. 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— 2010 The World Bank Washington, D.C.
  4. 4. ©2010 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 13 12 11 10 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. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, de- nominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank and IFC encourage dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750- 4470; Internet: www.copyright.com. 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 Paperii | Gender and Development
  5. 5. Table of ContentsAbbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viAcknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viiiForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ixExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xManagement Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xxiChairperson’s Comments: Committee onDevelopment Effectiveness (CODE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxix1 . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Evaluation Issues and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 . The Global Crisis and Its Impact on Developing Countries . . . . . . . . . . . . . . . . 6 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Globalization of the U.S. Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Impact of the Crisis on Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Social Impact of the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Fiscal and Debt Dynamics: Before and After the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Comparison with Previous Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 . The World Bank Group’s Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 World Bank Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 IFC Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 MIGA Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 . Assessment of the World Bank Group Response . . . . . . . . . . . . . . . . . . . . . . . . . 44 Assessment of World Bank Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Assessment of the IFC Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Assessment of MIGA’s Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695 . Lessons and Issues for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Lessons from Past Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Emerging Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Issues Going Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Appendix A: Evaluation Methodology | iii
  6. 6. Statistical Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106 Photographs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108 Boxes 2.1 The Three Phases of the Bank’s Strategic Approach to Agriculture . . . . . . . . . 12 3.1 Special Thematic Crisis Response Initiatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3.2 Velocity of Disbursements: Comparison of DPOs and Investment Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.3 Portfolio of AAA to Inform Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.4 IBRD Capital Adequacy: Evolution of Development Committee Views . . . . 28 3.5 What Low-Income Countries Say about the Bank’s Crisis Performance . . . . 31 3.6 Examples of Projects Originated through the IFC Crisis Initiatives . . . . . . . . . 33 3.7 Examples of IFC’s Crisis-Period Interventions in IDA and non-IDA Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.1 Case Study Countries: Crisis Severity and World Bank and IMF Financial Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 4.2 Mexico: A Substantial Crisis Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 4.3 Indonesia: Bank Support through Contingency Financing . . . . . . . . . . . . . . . . 47 4.4 India: Comprehensive Crisis Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.5 Hungary: Delayed Attempt to Support a Graduated Country . . . . . . . . . . . . . 49 4.6 Georgia: Bank Readiness and Leadership in a Post-Conflict Situation . . . . . . 49 4.7 Turkey: Adaptation of an Existing Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4.8 Georgia: A Systemic Crisis Response by IFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Figures 2.1 Crisis Chronology, 2007–10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Private Capital Flows, 2006–10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.1 IBRD/IFC Financing to Developing Countries, Fiscal Years 1990–2010 . . . . . 17 3.2 World Bank Commitments and Disbursements: The Long View . . . . . . . . . . . 18 3.3 The Evolving Forecast for 2009: The Bank and Others . . . . . . . . . . . . . . . . . . . . . 26 3.4 Impact of Crises on Bank-Fund Collaboration in LICs and MICs . . . . . . . . . . . . 30 3.5 Implementation of IFC’s Global Crisis Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.6 IFC Investment Commitments, Fiscal Years 2005–10 . . . . . . . . . . . . . . . . . . . . . . 36 3.7 Net IFC Commitments by Region, Fiscal Years 2008–10 . . . . . . . . . . . . . . . . . . . 37 3.8 Net IFC Commitments by IDA Status, Fiscal Years 2006–10 . . . . . . . . . . . . . . . . 37 3.9 IFC Instrument Mix, Fiscal Years 2008 –10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3.10 Net IFC Commitments by Industry Cluster, Fiscal Years 2008 –10 . . . . . . . . . . 39 3.11 MIGA: Volume of Guarantees Issued by Region, Fiscal Years 2008 –10 . . . . . 41iv | The World Bank Group’s Response to the Global Economic Crisis
  7. 7. 4.1 Changes in Net IFC Commitments and Net Private Investment by Income Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 604.2 Productivity of IFC Investment Staff, Fiscal Years 2008–10 . . . . . . . . . . . . . . . . . 624.3 IFC Financing Projections, 2009–13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644.4 Additionality and Development Outcomes of IFC Investment Operations in Past Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Tables2.1 Growth Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92.2 Poverty in Developing Countries, Alternative Scenarios, 2005–20 . . . . . . . . . 112.3 General Government Gross Debt by Country Group . . . . . . . . . . . . . . . . . . . . . . 112.4 General Government Balance by Country Group . . . . . . . . . . . . . . . . . . . . . . . . . 123.1 World Bank Group Commitments, Fiscal Years 2008–10 . . . . . . . . . . . . . . . . . . 173.2 IFI Financial Flows, Fiscal Years 2009–10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183.3 Regional Shares of Bank Lending Commitments and Disbursements . . . . . 193.4 World Bank Operational Productivity for New Lending . . . . . . . . . . . . . . . . . . . . 293.5 IFC’s Crisis Initiatives: Funding and Deployment . . . . . . . . . . . . . . . . . . . . . . . . . . 343.6 Staff Mix in IFC Investment Operations, 2008–10 . . . . . . . . . . . . . . . . . . . . . . . . . 363.7 Countries with Largest Net Commitment Changes by IDA Status . . . . . . . . . 383.8 Changes in Net IFC Commitments by Subsector. . . . . . . . . . . . . . . . . . . . . . . . . . 403.9 MIGA Projects and Guarantee Volume, Fiscal Years 2008 –10 . . . . . . . . . . . . . . 413.10 MIGA: Volume of Guarantees Issued by Sector, Fiscal Years 2008 –10 . . . . . . 414.1 Selected Development Policy Operations Approved in Fiscal Years 2009–10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504.2 Net IFC Commitments and Net Private Investment Relative to Changes in Country Risk Perceptions, 2008–09 . . . . . . . . . . . . . . . . . . . . . . . . . . . 594.3 Changes in Private Investments of Multilateral Development Banks, 2007–09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 604.4 Private Sector Deals Supported Jointly by IFC and Other IFIs in Case Study Countries, 2008–10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654.5 Performance of the GTFP and the GTLP, July 2008 to June 2010 . . . . . . . . . . . 664.6 Nature of IFC Investments in Case Study Countries . . . . . . . . . . . . . . . . . . . . . . . 68 Table of Contents | v
  8. 8. 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 MDGs Millennium Development Goals M&E Monitoring and evaluationvi | The World Bank Group’s Response to the Global Economic Crisis
  9. 9. MEF Microfinance Enhancement FacilityMFI Microfinance institutionMIC Middle-income countryMIGA Multilateral Investment Guarantee AgencyOECD Organisation for Economic Co-operation and DevelopmentOPCS Operations Policy and Country Services (World Bank)OPEC Organization of Petroleum Exporting CountriesPREM Poverty Reduction and Economic ManagementRSR Rapid Social Response (Program)SDN Social Development NetworkSMEs Small and medium enterprisesSWAps Sector-wide approaches Abbreviations | vii
  10. 10. Acknowledgments This report presents findings of the first phase of an Inde- School Network and a former Director of the Economics pendent Evaluation Group (IEG) evaluation of the World Department and Chief Economist for the International Fi- Bank Group’s response to the global economic crisis. The nance Corporation. second phase of the evaluation is expected to be completed Comments received from World Bank Group management in 2011. This evaluation was conducted by a team led by Is- on an earlier draft of this report are gratefully acknowledged. mail Arslan and Daniel Crabtree, drawing on contributions In addition, the evaluation benefited from comments and from (in alphabetical order) Federico Arcelli, Amitava Ba- suggestions raised, notably by the Bank’s Chief Economist nerjee, Shahrokh Fardoust, Ann Flanagan, Nils Fostvedt, and Regional Chief Economists, during an informal discus- Javed Hamid, Houqi Hong, Sarwat Jahan, Basil Kavalsky, sion meeting convened by the Director-General. Carla Pazce, Manuel Peñalver-Quesada, Anwesha Prabhu, Joanne Salop, Marcelo Selowsky, and Steven Webb. Agnes This first phase of the evaluation was overseen by an IEG Steering Committee comprising Daniela Gressani, Deputy Santos and Richard Kraus were responsible for administra- to the Director-General, Evaluation, and Senior Advisor; tive and production aspects. Caroline McEuen edited the Ali Khadr, Senior Manager, IEG-World Bank; Marvin Tay- document. lor-Dormond, Director, IEG-International Finance Corpo- The peer reviewers for this first phase of the evaluation were ration (IFC); and Stoyan Tenev, Head of Macro Evaluation, Johannes Linn, Senior Resident Fellow, Emerging Markets IEG-IFC. The evaluation is conducted under the guidance Forum, and former World Bank Vice President for Europe of Cheryl Gray, Marvin Taylor-Dormond, and Christine I. and Central Asia, and Guy Pfeffermann, Chief Executive Wallich. The work is carried out under the overall leader- Officer and Chairman of the Board at the Global Business ship 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. Crabtreeviii | The World Bank Group’s Response to the Global Economic Crisis
  11. 11. ForewordResponding to the global economic crisis that broke out in Bank Group’s own resourcing and capital adequacy forthe second half of 2008, the World Bank Group has per- managing higher levels of commitments and meeting up-formed a strongly countercyclical role. Its disbursements coming challenges, notably downswings in the global econ-of $80 billion in the past two fiscal years were the largest omy. It is an open question if an alternative path, calibratingamong the multilateral development banks (MDBs). The the acquisition and application of capital to the changingvolume of financing from the World Bank Group— as well medium term needs of countries, would eventually yieldas the other MDBs—has fitted the nature of the crisis, which better results over time.called for a fiscal expansion to compensate for sharply de- What is clear from the experience of this crisis reaction isclining trade and private capital flows. the benefit of taking a strategic approach, balancing capitalThere was notable variation across the Bank Group re- adequacy, effective deployment of resources, and results onsponse, with substantially increased International Bank for the ground. Elements in such an approach would includeReconstruction and Development (IBRD) lending, moder- both 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 mostthe Bank Group lending have been middle-income coun- effective.tries (MICs), some that were especially affected by the cri- • Keeping in focus the priority for supporting structural sis. With the MICs now leading the global recovery, this reforms in countries for inclusive and environmentallyengagement also shows the part the Bank Group now plays sustainable growth, even or especially in the midst ofin stabilizing world economic growth. immediate crisis demands.The crucial question concerns the effectiveness and sustain- • Maintaining sector or thematic skills and related insti-ability of this crisis response. Good use of funds to sustain tutional capabilities in ways that outlast fads or near-growth and ensure macroeconomic stability is more impor- term 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, cred-support for the capacity of clients—sovereign or otherwise— ibility, 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 Photo courtesy of Arne Hoel/World Bank. Foreword | ix
  12. 12. Executive Summary The global economic crisis that began in 2008 threatened to in infrastructure. Whether a more tailored, short-maturity erase years of progress in developing countries. In response, instrument would have helped the response, and the Bank’s the World Bank Group increased lending to unprecedented own financial sustainability, is an open question. levels. The World Bank posted a large increase in middle- IFC’s financial capacity, though impaired by the crisis, could income countries (MICs), and a much smaller one in low- still have supported a moderate countercyclical response. Ul- income countries (LICs). The International Finance Cor- timately, IFC’s response was largely procyclical, following a poration (IFC) focused on trade finance, mainly in LICs. Its v-shaped pattern overall. Its crisis initiatives showed creativ- new business initially fell in MICs, rebounding only in late ity and strategic positioning in soliciting funds from external fiscal 2010. The Multilateral Investment Guarantee Agency partners and creating a new subsidiary, the Asset Management (MIGA) concentrated on guarantees in Eastern Europe. Company. Overall, the response has delivered positive effects, Analytic and advisory work helped inform government and mostly in LICs, with existing clients, and in cofinanced opera- private sector responses to the crisis. tions. But opportunities were missed, and the effectiveness of Increases in financing volume must be matched by qual- the initiatives has been diluted by design and implementations ity to achieve sustained economic results. Quality-at-entry weaknesses—such as the time needed for fund-raising and indicators have generally been positive. But certain areas— internal capacity building. MIGA helped several key financial the financial sector specifically and results on the ground institutions in Eastern Europe through guarantees. more generally—are a cause for concern, particularly given A crisis originating in Organisation for Economic Co- continued tight budgets. The financial headroom available operation and Development (OECD) countries tests the to the International Bank for Reconstruction and Develop- readiness of the International Monetary Fund (IMF) first, ment (IBRD) enabled it to launch a large response in a few but global interdependence also requires a high state of MICs, driven by country demand, while the more modest Bank Group readiness. Three aspects contributing to the International Development Association (IDA) response Bank’s readiness were knowledge of poverty impacts, long- reflected an inelastic funding envelope and performance- term relationships with country authorities, and IBRD’s based resource allocation. Most crisis-related Bank financ- inherited financial headroom. Areas of weakness included ing was channeled to economic policy, social protection, dissemination of global economic forecasting updates at and the financial sector through record levels of develop- the onset of the crisis and early recognition of, and action ment policy lending, while slower-disbursing investment on, country financial sector vulnerabilities. With IDA, a operations supported longer-term investment, especially midterm increase in resources may have been warranted. Photo courtesy of Curt Carnemark/World Bank.x | The World Bank Group’s Response to the Global Economic Crisis
  13. 13. IFC lessons include the need for financial headroom, suf- fiscal and external imbalances and financial sector vulner-ficient risk appetite, leveraging existing partnerships and abilities. MICs were more affected than LICs, althoughplatforms, and staying focused on development effective- LICs had greater vulnerability to negative shocks. Experi-ness. MIGA urgently needs greater product flexibility and ence gained during the crises of the 1990s increased theenhanced business development. preparedness of several countries, often with Bank Group help in reforms.This assessment underscores the strong countercyclical rolethat the Bank Group eventually played, with partners and Consensus emerged on the need for fiscal stimulus, with-countries, to help withstand the global downturn. Its ex- in budget constraints. Those with limited fiscal space hadpansionary nature fit the profile of the crisis, but the emerg- less room to respond and suffered more severe impacts.ing deficits, debt, and financial sector vulnerabilities place But as a group, developing countries have grown morea premium on effectiveness of resource use, generation of quickly than industrial countries, and they are leading thesustainable growth, and macroeconomic stability. The as- global recovery. Developing country debt-to-GDP (grosssessment does not address the open question of whether domestic product) ratios were lower at end-2009 than atan alternative response, involving a lower level of financing end-2000, though higher than in 2007. But fiscal deficitsin fiscal years 2009–10, coupled with a greater financial ca- in both developed and developing countries have worsenedpacity going forward might have better optimized the Bank over the past two years (by a sharp 5 percentage points inGroup’s capital use over the coming years. developing countries). Countercyclical spending programs are starting to be rolled back as the recovery takes hold.This report presents an initial real-time evaluation of thereadiness, relevance, quality-at-entry, short-term results, The crisis reversed the decline in poverty of the pastand likely sustainability of the Bank Group response from decade. The Bank Group estimates that by end-2010, anthe start of the crisis through fiscal 2010. This evaluation additional 114 million people worldwide will have fallenbuilds on a 2008 Independent Evaluation Group (IEG) as- below the $1.25 a day poverty line since the onset of thesessment of Bank Group interventions during past crises crisis. Even with a rapid recovery, some 71 million peopleand draws extensively on 11 country case studies and field would remain in extreme poverty by 2020 who would havevisits. Given the short time since the crisis response started, escaped it had the crisis not occurred. Unemployment ratesthe evaluation is geared more to raising flags than to pre- remain high in several countries.senting definitive conclusions.The evaluation begins with a review of the impact of the World Bank Group Responsecrisis on developing countries, before describing and as- Once triggered by high-profile events, the crisis spreadsessing the Bank Group response, and inferring lessons and quickly, taking many—including the Bank Group—byimplications for the future. surprise. The Bank Group responded to the crisis in waves. Its initial response narrowly focused on increasing BankImpact on Developing Countries lending, especially in MICs. As the scale of the demand be- came apparent, the Bank rationed available IBRD capitalThe first signs of crisis in the developing world were sharp and obtained Board approval for an IDA Fast-Track Facil-contractions in private capital flows and trade. From a ity. IFC and MIGA developed initiatives to leverage theirpeak of around $1,200 billion in 2007, net private capital impact and (in IFC’s case) mobilize funds.flows to developing countries fell by over a third in 2008, asthe liquidity squeeze in advanced economies led investors After initially underscoring only the volume of finan-to pull back from emerging markets. Private flows weak- cial support, the Bank Group over time set out linkagesened further in 2009. There are indications of a rebound in across programs. In March 2009, the Bank Group an-2010, however, with the expectation that flows will increase nounced that it was “stepping up…financial assistance toby 30 percent over 2009. Trade also fell sharply, as export help its member countries mitigate the impact of the crisis”markets collapsed, although these volumes are also starting to $100 billion for IBRD, $42 billion for IDA, and $36 bil-to recover. lion for IFC. The financial assistance would fall under three operational crisis-response pillars: protect the most vulner-The severity of the crisis has varied across countries, re- able; maintain long-term infrastructure investment; andflecting differences in geography, country policies, and sustain the potential for private sector–led growth, with “anglobal integration. The Latin America and the Caribbean over-arching focus on macroeconomic stability.”and Europe and Central Asia Regions were the most af-fected. Countries in Latin America and the Caribbean were International financial institutions (IFIs) respondedhighly integrated with the U.S. economy, the epicenter of strongly to the crisis and posted the largest-ever finan-the crisis, while Europe and Central Asia countries had cial flows to the developing world—with the World Bank Executive Summary | xi
  14. 14. Group registering the largest disbursements. All IFIs have The decline in Sub-Saharan Africa’s share reflects the sharp seen sharp increases in financing, though the total amounts increase in IBRD lending relative to IDA, rather than any of the IMF and Bank Group are much larger than those of diminution of lending to Sub-Saharan Africa. the other IFIs. Between fiscal years 2009 and 2010, the IMF The sector allocation of resources was consistent with the committed $219 billion and disbursed $67 billion, the no- Bank’s goals for the crisis response. Economic policy, the table difference reflecting the contingent nature of much of financial sector, and social protection represented 65 per- its support. In the same period, the Bank Group commit- cent of the $28.8 billion increase in disbursements in fiscal ted $128.7 billion and disbursed a record $80.6 billion—a years 2009–10. Social protection, 17 percent of the increase, larger amount than other IFIs, including the IMF. Bilateral was mainly development policy operations (DPOs) and development assistance also increased, by nearly $20 billion quick-disbursing investment loans, and was concentrated between 2007 and 2009. in few loans and few countries, with 60 percent going to Capital headroom was a determining factor. Low pre-cri- Colombia, Ethiopia, Mexico, and Poland. Infrastructure sis demand for IBRD funding left it with the headroom to operations accounted only 18 percent of the increase in dis- increase lending nearly threefold during fiscal years 2009– bursements, despite being 30 percent of new commitments, 10. In contrast, the IDA funding envelope, determined be- reflecting longer lead times. fore the crisis, enabled a lesser increase (25 percent). Given equity 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 among borrowers, and was historically low at the onset of the crisis. World Bank Bank commitments and disbursements reached an all- Photo courtesy of Scott Wallace/World Bank. time high. During fiscal years 2009–10, the Bank commit- ted over $105.6 billion and disbursed $68.1 billion, com- pared with $49.4 billion and $39.2 billion during fiscal years Much of the increased lending was delivered through 2007–08. The vast majority of the increase was through the DPOs, but investment lending was robust. Investment IBRD. Sixty-five percent of IBRD disbursements were from lending accounted for about 60 percent of commitments commitments approved since July 2008; the ratio for IDA and disbursements in fiscal years 2009–10, and DPOs— was 36 percent. The majority of disbursements from pre- a medium-term instrument whose suitability for a crisis crisis commitments were investment loans, which showed is unclear—for approximately 40 percent. For the IBRD, little evidence of faster disbursement than in previous DPOs edged above 50 percent of commitments and dis- years. bursements in fiscal years 2009–10. For IDA, more than 75 percent of commitments and disbursements were invest- The distribution of lending broadly mirrored differential ment operations. The Bank’s response to the East Asian crisis impact and financing needs, as well as differences crisis was similarly focused on IBRD policy-based lending. in IBRD and IDA resources. Latin America and the Ca- But unlike the Bank’s pattern in that event, IBRD invest- ribbean and Europe and Central Asia, the most severely ment lending commitments grew rapidly during this cri- impacted Regions, saw their shares rise. The focus was on sis, fueled by large energy and transport loans to MICs that social protection and other countercyclical programs in have disbursed little to date. Latin America and the Caribbean, and on fiscal and debt sustainability in Europe and Central Asia. Conversely, the The Bank’s analytic response has had a relatively low shares of Sub-Saharan Africa and East Asia and the Pacific profile. Analytic work did not feature in the objectives (or declined, while the share of the Middle East and North instruments) of the Bank’s crisis-response strategy. But cen- Africa remained broadly unchanged, and the South Asia tral units, especially Development Economics (DEC) and share declined in fiscal 2009, before bouncing back in 2010. Poverty Reduction and Economic Management (PREM),xii | The World Bank Group’s Response to the Global Economic Crisis
  15. 15. did significant analytic work. There were also trust funds considerably. Within these clusters, investments in physicalfor diagnostic work. Analytic work was supported by Re- infrastructure (particularly electric power) and agribusinessgional and country units, according to resource availability (agriculture and forestry in particular) declined most.and the severity of the crisis impact. Activities in advisory services increased. Expenditures onIFC new crisis-related advisory products (nonperforming loanIFC responded with new global initiatives —including management and insolvency regimes) were relatively small,the creation of a new subsidiary—and actions through at $13 million, through the end of fiscal 2010, although ex-its regular business. The initiatives involved new delivery penditures on core products (such as corporate governanceplatforms targeting trade finance, infrastructure, microfi- and business environment work, mostly approved prior tonance, bank capitalization (overseen by a new subsidiary, the crisis) increased by around $20 million in fiscal 2009the Asset Management Company), and distressed asset and were often linked to crisis needs.management. They were intended to leverage IFC’s funds MIGAwith up to $24 billion from external partners (development MIGA’s response is built around but not limited to a newfinance institutions in particular) by 2011. IFC also par- global Financial Sector Initiative, focused initially on theticipated in joint IFI initiatives in Europe and Central Asia, Europe and Central Asia Region. Under this initiative,Latin America and the Caribbean, and Sub-Saharan Africa. part of the Joint IFI Action Plan for Central and EasternIFC made $20 billion in net commitments between fiscal Europe, MIGA announced it would provide up to €2 bil-years 2009 and 2010 from its own account, alongside efforts lion in political risk insurance on cross-border investmentsto ensure the financial sustainability of its portfolio. by financial institutions to recapitalize or provide liquid-IFC’s initiatives were designed for phased implementa- ity to subsidiaries. Drawing on its capacity to arrange re-tion, but have been well behind schedule. Three stages of insurance, this could commit up to $1 billion of MIGA netneeds were envisaged: short-term liquidity (trade); longer- exposure in the Region. In fiscal 2010, guarantees totalingterm liquidity and equity capital (microfinance, infrastruc- $918 million were issued under the initiative (six contractsture, and bank capitalization platforms); and recovery sup- issued in Serbia, Croatia, Latvia, and Kazakhstan), bringingport (distressed assets management). As of June 30, 2010, MIGA’s total cumulative support under the Financial Sec-$9.2 billion had been approved for new initiatives, but only tor Initiative to $1.5 billion in gross guarantee coverage.$1.9 billion had been disbursed. The new Global Trade Li- MIGA’s guarantee issuance remained broadly unchangedquidity Program (GTLP) is the only one close to its target. but has become increasingly concentrated in the finan-IFC’s new business during the crisis has followed a v- cial sector since the crisis began. MIGA’s guarantee ac-shaped pattern. New IFC business, which had more than tivity remained at trend levels during the crisis, with somedoubled from 2005 to 2008, fell by 18 percent in fiscal 2009, $1.4–$1.5 billion in new guarantees in fiscal 2009 and 2010.before increasing 28 percent in 2010. The v-shaped pattern At the same time, cancellations declined and MIGA’s grossof investment largely mirrors that of private investment as outstanding portfolio of guarantees reached $7.7 billion ina whole. Meanwhile, IFC doubled the number of portfolio fiscal 2010 (19 percent over fiscal 2008), as more investorsstaff and carried out stress tests on its portfolio clients. held onto their guarantees. MIGA’s crisis response initiativeIFC’s new business increased in LICs but, unlike the resulted in a large share of its guarantees issuance concen-Bank’s pattern, fell in MICs. IFC’s investments in IDA trated in the Europe and Central Asia Region and in thecountries increased 24 percent between fiscal years 2008 financial sector, while activity in infrastructure fell sharply,and 2010. Commitment increases were largest in Ghana to some extent reflecting market developments. Guaranteesand Pakistan. Conversely, IFC reduced its investment vol- in IDA countries also declined as a share of guarantee vol-umes in larger MICs, such as the Philippines, the Russian ume. Guarantee issuance was concentrated in terms of cli-Federation, and Turkey. The focus in MICs was more on ents (guarantee holders), with the top two clients account-minimizing portfolio losses. New loan pricing rose sharply. ing for 80 percent of guarantees issued in fiscal 2009. FullyOnly in the final quarter of fiscal 2010 did MIC commit- 88 percent of new guarantee issuance that year supportedments start to rebound. projects in the Europe and Central Asia Region.The crisis accelerated a trend in IFC toward short-term fi- Assessment of the World Bank Groupnancing. Global Trade Finance Program (GTFP) guaranteeshave grown from a seventh to a third of new IFC commit- Responsements over the crisis period, contributing to a shift in re- World Banksource allocation toward the financial sector. Longer-term Lags in the Bank’s adaptation to the crisis affected theinfrastructure and real sector investments have declined early phases of the response. At the 2008 Annual Meetings, Executive Summary | xiii
  16. 16. the Bank focused on the need for a new multilateralism. have crowded out new analytic work, a critical determinant The IMF called for an immediate and coordinated response of the quality of policy dialogue and lending, while in many to the crisis. Given that the crisis emerged in the financial others trust funds and/or incremental allocations from the sector of advanced economies, the IMF had a more natural Bank’s budget allowed continuation of the work. role in leading and sounding the alarm, but the Bank still The design of programs appears to have been tailored needed to—and eventually did—react strongly. to countries’ diverse needs. Quality of program design Once the Bank internalized the crisis, the speed of its was high in Georgia, Indonesia, and Mexico. In Hungary, response was helped by several factors. The Bank’s ongo- however, the Bank did not respond adequately to country ing relations and dialogue enabled more rapid engagement needs. The quality of the Bank’s prior engagement with the with country authorities. Speed was also facilitated by Bank country seems to have been a determining factor. And co- Group leadership and the establishment of a central opera- ordination with other partners, including the IMF, helped tional structure, with the Operations Committee and the enhance quality and relevance, and thus likely impact. newly formed Crisis Response Working Group chaired by Quality at entry of DPOs has been notably varied, re- Operations Policy and Country Services. flecting sector strengths and weaknesses. The evaluation Readiness was helped by the Bank’s financial position at made an initial assessment of quality at entry for 46 DPOs, the start of the crisis. IBRD went into the crisis with an covering 68 percent of DPO volumes approved during the equity-to-loans ratio of 38 percent, compared with a target crisis period. The ratings were satisfactory on average, but range of 23–27 percent, giving it substantial room to ex- ranged from highly satisfactory to unsatisfactory. The sub- pand lending. This reflected prudent financial management stantive program policy content and results frameworks for as well as stagnant demand from MICs during the previous financial sector DPOs were the weakest, followed by infra- years. IBRD commitments had declined by 5 percent dur- structure. Results frameworks for economic policy work ing fiscal 2007–08. IDA15 had just become effective on July had the most acceptable levels of quality, followed by social 1, 2008, increasing IDA resources by about 25 percent, on protection. top of a 25 percent increase in fiscal 2006–08. The Bank’s flat overall administrative budget compli- Another positive factor was the Bank’s ability to draw cated delivery, which made the operational efforts all the on its research and knowledge of poverty reduction— more notable. Administrative resources for Bank country which now needs to be maintained. This included surveys services rose about 5 percent annually in fiscal 2009 and enabling better targeting. The accumulated knowledge re- 2010, barely enough to cover the surge in the operational flected continuing investments by DEC, PREM, and the work program that was associated with the crisis response. Human Development Network (HDN) over the years on The implied “productivity” increase was achieved in part poverty, social safety nets, and labor markets. Examples in- through larger project size, which doubled for IBRD and clude Bank support for conditional cash transfer programs increased by 30 percent for IDA. But economies of scale in Bangladesh, Colombia, and Mexico and labor market have limits, raising important concerns—now and going improvements in Poland, Turkey, and Vietnam. Ongoing forward—about trade-offs with operational quality (at en- monitoring of the poverty and social effects of the crisis try and in supervision) and analytic work. In Ukraine and could, however, have been more systematic. elsewhere, there was a lack of funding for economic studies; but not in Indonesia or Mexico, given trust funds in the The increase in lending was concentrated in the MICs former and central contingency funds in the latter. most hurt by the crisis, such as Colombia, Mexico, Tur- key, and Ukraine. There were important exceptions, how- Attention to poverty issues was greater than in previous ever, such as the large increase in IBRD commitments to crises. The 2008 IEG review of lessons from previous cri- Indonesia, among the least-affected countries, which served ses emphasized the importance of identifying the poverty as support for the country’s crisis-prevention efforts. India, and social impact of a crisis, including measures directed moderately affected by the crisis, has seen a record rise in to address these impacts. The focus on poverty issues at the commitments in fiscal 2010. country level was apparent in the content of DPOs, other lending (and supplemental financing) for community-driv- The relevance of the Bank’s analytic response is signifi- en development projects, and analytic work on improved cant in some countries, but weak in others. Earlier analyt- targeting of safety nets. At the same time, ongoing moni- ic work provided a platform for the Bank response in some toring of the social and poverty effects of the crisis could countries, sometimes in conjunction with international be enhanced. support packages. Where limited prior work was available, the quality of lending suffered. In some countries, in Europe Fiscal and debt sustainability analysis was present in and Central Asia in particular, increased lending appears to DPOs, but could have paid greater attention to macroxiv | The World Bank Group’s Response to the Global Economic Crisis
  17. 17. and political-economy risks. As required, DPO program mately one-third of client countries. The lost capacity indocuments examined fiscal and debt sustainability, com- the financial sector proved to be costly in identifying andplemented in many country programs by analytic work on responding to sector vulnerabilities, as did an ill-designedpublic expenditures, including public investment, and pov- 2007 strategy for the financial sector.erty alleviation. The objective of maintaining public invest- IFCment in infrastructure was also accompanied, in some cas- IFC’s response was important and creative, even as itses, with the objective of supporting employment (through execution did not match intentions. IFC’s $20 billion oflabor-intensive infrastructure) and other social objectives. investments in developing countries in fiscal 2009 and 2010But many risks to sustainability remain, in some cases re- was greater than any other IFI with private sector opera-lated to the underlying political economy of rollbacks in fis- tions over the same period. IFC also appropriately focusedcal stimulus and rationalizations of social security, pension, its response on key crisis vulnerabilities: trade, financial sec-and health system benefits. tor stabilization, and infrastructure. The initiatives showedThe Bank’s financial sector capacity had deteriorated, some learning from past crises, in being targeted, phased,with adverse consequences. Starting in 2005, the Bank temporary (in most cases), and involving partnerships.had subordinated its work on the financial sector to its ef- However, IFC’s added value has been less than expected,forts on private sector development more generally. Subse- since most initiatives were not “ready for use” and IFC didquently, with the exception of Europe and Central Asia and not fully use its own capital.Africa, units covering the financial sector were integrated IFC may have underestimated the challenges associatedwithin PREM. When the crisis hit, current Financial Sector with implementing new initiatives. Obstacles included:Assessment Programs (FSAPs) were available for approxi- 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, nota- bly through the establishment of a novel trust fund for in- vestments and in extending relationships built up through the GTFP. IFC’s capital position was impaired by the crisis, but could have supported a moderate countercyclical re- sponse overall. In September 2008, IFC’s balance sheet contained substantial unrealized equity gains, and write- downs were significant ($1 billion). Nonperforming loans were relatively low, but expected to rise. IFC had also com- mitted to significant grants to IDA ($1.75 billion between fiscal 2008 and 2010). Nonetheless, IFC’s estimate that it could invest 5 percent more per year in fiscal 2009–11 than in 2008 was conservative, given a rating agency assessment that IFC was well capitalized and experience that showed gains in investing countercyclically during a crisis. Ulti- mately, IFC investments fell nearly 20 percent in the first year of the crisis—well below expectation. Most comparator institutions delivered countercyclical responses. Most other IFIs (European Bank for Recon- struction and Development, European Investment Bank, and Asian Development Bank) as well as Standard Char- tered (a private financial institution focused on emerging markets) were able to increase their investments in the first year of the crisis. In Europe and Central Asia, the European Photo courtesy of Eric Miller/World Bank. Bank for Reconstruction and Development (EBRD) con- Executive Summary | xv
  18. 18. centrated more on large-scale loans, while IFC focused on at the heart of the crisis and needed urgent assistance. MIGA equity transactions, alongside trade finance. supported some key financial institutions in the Region and helped keep down their borrowing costs. The drop in can- At the country level, IFC did little to refocus its top-down cellations also meant that MIGA played a supportive crisis approach. In Mexico, IFC’s strategy reflected the pre-crisis preference for niche investments in upper MICs. IFC loan role with existing clients. At the same time, MIGA did not pricing rose substantially as a result of the crisis, as perceived provide significant support elsewhere, and its guarantees in country risk increased, which worked against the country IDA countries and other priority areas fell. Awareness of team’s efforts to help global leaders and first-tier companies MIGA among major private sector parties in the countries in distress. In Indonesia, the approach was similarly cau- visited for this evaluation was low, indicating a need for tious, and too defensive given the relatively mild impact of stronger efforts at business development. And as IEG has the crisis and the extent of external support. The exception highlighted previously, MIGA needs to streamline its busi- was Georgia, where IFC provided support to two systemic ness processes and improve its client responsiveness. banks as part of a massive IFI package to assist the country. Early Outcomes and Risks Meanwhile, communications to investment staff were unclear, which promoted risk aversion. Staff received At this stage, the focus is on the early results relative to mixed messages: to identify countercyclical investment op- stated objectives: protecting vulnerable groups, main- portunities, but to preserve the balance sheet at all costs. taining infrastructure, and sustaining private sector–led Ultimately, portfolio management crowded out new busi- growth, within an overarching focus on macroeconomic ness development, which stagnated in mid fiscal 2009, no- stability. Partnerships and, above all, actions taken by tably in Europe and Central Asia. countries and companies, have been leading drivers of these early results. IFC was at its most responsive in LICs. IFC’s increased focus on IDA countries was sustained in the crisis period, a Bank Group disbursements helped countries maintain positive development in that IDA countries have a weaker social programs and microfinance. For example, in Co- economic base and have largely missed out on the influx of lombia, the Families in Action Program expanded assis- foreign capital prior to the crisis. tance, with Bank support, to approximately 2.7 million IFC adapted its instrument mix, but more local currency poor and displaced families. Similarly, in Mexico, the Bank financing was needed. GTFP dominated the increase in supported Oportunidades, the national conditional cash financing, much of it to support banks in Bangladesh and transfer program that helps 5.8 million of the country’s Vietnam. Trade finance is a relatively low-risk pathway to most vulnerable families to cope with poverty. In Bangla- reach small and medium enterprises (SMEs) in tough in- desh, an IDA loan was helpful in mitigating the impact vestment environments and requires limited capital. IFC’s of high food prices on the poor through an expansion of capacity for local currency finance was again limited, lead- social safety net programs, including public works. IFC’s ing to gaps in addressing financing needs of medium and trade initiatives have had a broad reach, supporting basic small enterprises. needs through food and energy trade. IFC’s new microfi- nance facility has had a modest effect. The drop in infrastructure and agribusiness investments reflected supply and demand constraints. In infrastruc- The Bank Group supported investments in infrastruc- ture, the focus on IDA and renewable energy contributed to ture, but there is little early evidence of any impact. First, smaller deal size. External conditions led to some projects be- few of the Bank’s large commitments for new investment ing cancelled or postponed. IFC nonetheless missed oppor- loans have been disbursed. Meanwhile, the quality of the tunities for impact, not least because the Infrastructure Crisis results frameworks for DPO support to the sector in In- Facility was not ready to complement IFC’s own account and donesia and Vietnam indicate risks to getting sustained re- help to address the infrastructure financing deficit in develop- sults. Second, IFC’s investments in infrastructure recorded ing countries. In agribusiness, an unanticipated suspension of one of the largest declines among all sectors, and its infra- palm oil investments, together with a review of supply chain structure facility has delivered only a handful of projects. issues, meant lost projects. Trade finance helps agribusiness The Bank Group provided strong support in trade finance indirectly, although increases here did little more than offset but missed opportunities in other areas related to private the drop in IFC’s direct agribusiness investments. sector growth. IFC provided timely and sizable liquidity MIGA support, especially in LICs, through its trade finance plat- MIGA’s heavy focus on the financial sector in the Europe forms. But it missed opportunities for strong additionality and Central Asia Region was in line with initial crisis and development impact, especially in MICs. MIGA’s weak needs. The financial sector in Europe and Central Asia was business development function was a binding constraintxvi | The World Bank Group’s Response to the Global Economic Crisis
  19. 19. on new guarantee volumes and results. The Bank provided approaches. And sixth, coordination is needed among thesizable support to the financial sector, but sustainability of World Bank, IFC and MIGA (and with other partners) toresults may be at risk due to insufficient attention to sector capitalize on linkages across government and business andreforms in some cases. catalyze economic activity.The Bank Group and partners contributed to confidence- The findings also point to specific early lessons for eachbuilding and macroeconomic stability, but crucial chal- Bank Group institution.lenges remain. Indonesia illustrates the value of contin- World Bankgency financing led by the Bank, with participation of the Continuing Bank involvement, policy dialogue, andAsian Development Bank, Australia, and Japan. IFC and analytic work are important prerequisites. This is evi-MIGA’s new private sector initiatives may initially have dent from the case study countries, both where the Bankhad positive signaling effects on markets. Experience has response worked well, as in Indonesia, Mexico, Mauritius,shown the importance of timely, visible investments by IFC and Ukraine, and where it did not, as in Hungary. It alsoin companies of systemic importance to send market sig- points to the critical importance of keeping diagnosticnals and for development impact—a standard only a few work in key areas up to date.investments met during this crisis. The Bank should balance advocating global prioritiesThe Bank Group helped authorities to think through with country ownership. The Bank’s identified sector andfiscal and debt sustainability issues, but timely fiscal thematic crisis-response priorities must be positioned asconsolidation is still needed. The Bank’s advice through menus for country selection to avoid the possible impres-DPOs, analytic work, and policy dialogue—often together sion of advocacy, especially where the Bank may be a pos-with that of the IMF, and including advice given in the years sible financier.leading up to this externally driven crisis—was importantin managing fiscal and debt vulnerabilities. The Bank also Greater clarity is needed in the use of instruments forcontinued to support reforms in public financial manage- crisis response. This evaluation found that country teamsment to make the budget more transparent, predictable, used DPOs, Additional Financing, and other instrumentsand performance oriented (for example, in Mexico, Poland, in innovative ways, with the endorsement of the Operationsand Vietnam). Especially in view of the economic uncer- Committee and approval of the Board. However, greatertainties and risks, there is a need for continuing invest- clarity on policy conditionality of crisis operations wouldments in analytic work. have facilitated the Bank’s response. The Bank needs to anticipate crises and be ready to actEarly Lessons quickly, taking into account quality trade-offs and consid-An overarching lesson emerging relates to the value of a ering benefits and costs across sectors.strategic approach to the Bank Group’s crisis-response ef- • The Bank should continue to play a proactive role infort, integrating six elements brought to the fore by this providing early warnings and alerts to clients and thecrisis experience. broader international community. In hindsight, an ex-First, in these uncertain times, early warning, prepared- ample is the value that could have been derived fromness, and timeliness, including an eye on long-term capital sharing updates of economic forecasts for developingadequacy, are key attributes for the World Bank and IFC. countries at the Annual Meetings and DevelopmentSecond, the benefits of the Bank’s country focus go hand in Committee Meeting of October 2008.hand with the need for a cross-country strategy to ensure • The Bank’s capacity in the financial sector needs to beconsistency with global initiatives and to deploy scarce re- maintained, as was also learned from the East Asian cri-sources where they produce the best results. Third, even as sis. Core capacity is needed in order to maintain stead-it responds to crisis, the World Bank Group needs to keep fast attention to capital adequacy; independent supervi-the requisites of sustainable long-term growth—among sion and regulations; timely and transparent reporting;others, fiscal and debt sustainability, the structural reform and, on investment lending, to ensuring that financialagenda, and the environmental and climate change agen- intermediaries have balanced assets and liabilities withda—in focus. respect to maturities and foreign exchange exposure.Fourth, particularly in averting a crisis, it is costly to let the • It is vital to be up-to-date on diagnostic country eco-Bank’s expertise in key areas (in this case the financial sec- nomic and sector work in key areas. The public expen-tor) decline. Fifth, there is a need to balance the value of in- diture review is a signature Bank contribution, especial-novations and new initiatives in the middle of a crisis with ly in order to support prioritization of sector aspects ofcontinuity of support using more established and proven the crisis response. Executive Summary | xvii
  20. 20. • IBRD capital headroom in a crisis is central. This experi- Responding to the crisis through existing platforms and ence reveals the importance of anticipating capital ad- partnerships has generally proved more effective than equacy at the outset, as well as its use during the crisis. It working through new ones. Experience shows the benefits remains an open question whether it was best for the Bank of having ready financing and advisory platforms. Innova- to use up virtually all of its capital headroom in respond- tions are important, yet it is unwise to develop numerous ing to the crisis. MIC demand for countercyclical lending new financing platforms on the run in a crisis, particular- may remain significant, but IBRD response capacity may ly platforms that are managed by third parties or involve not be large, even with the recently agreed capital increase. fundraising from multiple new sources. New programs and New instruments need to be put in place, involving shorter relationships absorb time and resources that could be de- maturities or a combination of pricing and maturities for ployed to frontline operations. early payback, possibly with a countercyclical financing fa- Finding the right level of adaptation to changing circum- cility as in other multilateral development banks (MDBs). stances is fundamental for an effective crisis response. IDA must remain the Bank’s flagship resource-mobiliza- IFC will need to find the right level of change, including tion activity. IDA fast-tracking helped to speed the pro- determining which initiatives continue to have relevance cessing of eligible operations, but it was no substitute for and which might be dropped, as well as how new partner- increased resources. IDA committed 24 percent more in ships and platforms are best aligned with IFC’s business fiscal years 2009–10 than in fiscal 2007–08 and disbursed model. In a future crisis, IFC may want to postpone rapid 15 percent more. IDA crisis financing had to be accommo- internal reorganization and develop mechanisms to incor- dated within the IDA15 resource envelope that was agreed porate local views and knowledge to enable differentiated in 2007. Though MICs have been more affected by the crisis responses. given their greater global linkages, LICs are far less able to The shift in IFC instruments toward trade finance guar- bear the costs of the crisis to them, and there is thus a need antees was useful, but the instrument mix will need to for greater Bank proactivity on their behalf. shift again. Short-term trade finance was useful, because it Finally, it is crucial to assess emerging impacts early to could be ramped up through IFC’s broad network of utili- identify quality problems and risks and remedial action. zation banks. It also absorbed limited capital. As commer- The evaluation identified quality risks and concerns in sec- cial providers enter the market, IFC will need to look to tor DPOs—especially in the financial sector and in infra- other instruments. Capacity to offer local currency finance structure. was again lacking in this crisis, creating considerable risks for SME clients with local-currency revenue streams. IFC IFC’s development role is vital, and looking beyond port- Monitoring and evaluation (M&E) for new programs will folio protection is essential. IFC will need to have sufficient need to improve. The importance of robust results frame- resources for a significant catalytic role when the next crisis works is magnified where new delivery structures are being strikes and be willing to take more investment risks—as it created to ensure quick feedback on what is working and has done in Africa. Incentives and mechanisms for increased what is not. M&E of new initiatives will need to be made equity divestment could also be helpful in freeing up funds more systematic. The difficulties in measuring the develop- for a crisis response. Active, routine portfolio stress testing ment impact of the GTFP and GTLP, not covered in IFC’s can be useful, as opposed to reactive portfolio management M&E framework, need to be addressed. that may crowd out new business, as in this crisis. MIGA A crisis response has to be founded on partnerships, but For MIGA, the crisis has amplified the need for product cooperation needs the right incentives and support. Given flexibility and business development. MIGA’s portfolio the vast financing needs a crisis can generate, no single de- experienced a net increase during the crisis period as guar- velopment institution is likely to have sufficient capacity to antee issuance remained at trend levels and cancellations respond. Partnerships are therefore essential. In some cases, declined, and MIGA’s focus on the financial sector in the partnerships allowed for strong leveraging of IFC funds, Europe and the Central Asia Region was strong. Yet glob- particularly where the initiatives were not seen solely as IFC ally, MIGA’s crisis response was not significantly counter- programs and where IFC’s sector expertise was well recog- cyclical. This reflected the inherent structural constraints nized. In other cases, cooperation stalled due to nonaligned of its Convention as well as weak business development. interests and decision-making procedures, incentive prob- MIGA needs to revamp its business development function lems, and legal issues. IFC will need to be sensitive to partner to reverse the current stagnation in guarantee issuance and needs and institutional arrangements and create incentives enable the Agency to meet its business volume targets and for them to participate fully in joint programs. strategic priority goals. The recent approval of the changesxviii | The World Bank Group’s Response to the Global Economic Crisis
  21. 21. to MIGA’s Convention to allow greater product flexibility Financial sector reform. Financial sector weaknesses per-is an important step, and needs now to be complemented sist in the global economy and continue to pose downsideby more streamlined business processes and proactive busi- risks to recovery in advanced and developing countries.ness development efforts. There is a pressing need to shift from emergency support to addressing the structural weaknesses exposed by the crisis.Issues Going Forward This would involve repairing or strengthening financial sys- tems while reforming prudential policies. The Bank GroupThe crisis created an immediate need for countercyclical can help, but it needs to rebuild its capacity.spending in developing countries, which the Bank Groupand others have supported. To help sustain the recovery, Poverty and unemployment. As in previous crises, un-contribute to longer-term growth, and improve the response employment, one of the main causes of worsening povertycapacity of the Bank Group, attention needs to be given to levels, has lagged GDP growth. Monitoring of the povertytwo areas: policy change and organizational effectiveness. and social effects in this crisis has emerged in an ad-hocPolicy issues concern fiscal sustainability, public-private syn- manner, and higher-frequency tracking is needed goingergies, financial sector reform, poverty and unemployment forward. A greater focus on LICs and inequities in MICs is also required. Environmentally sustainable growth. Climate change and environmental problems are tougher to deal with in the face of a financial crisis, yet the sustainability of global economic growth necessitates simultaneous actions. To be effective, such longer-term investments need to be factored into any crisis response: the Bank Group’s strong participa- tion in scaling up public sector spending provides a unique opportunity. The Bank Group must build on the momen- tum in mobilizing funds for climate change mitigation to integrate greener development in its mainstream activities. Organizational Effectiveness Preparedness. As crisis-related events continue to evolve, Photo courtesy of Curt Carnemark/World Bank. the premium on early warning, financial preparedness, and operational readiness is at an all time high. Stronger fore- casting, with greater country/global connectivity, is crucial.alleviation, and greener growth. In terms of organizational Tools to optimize capital availability will be important,effectiveness, preparedness, managing quality trade-offs, co- given that the capital headroom of the World Bank and IFCordination, and a strong results focus will be crucial. has been virtually used up and the recent capital increasePolicy Issues provides only limited new headroom. From an operationalFiscal sustainability. Economic slowdown and fiscal ex- standpoint, rebuilding Bank Group financial sector capac-pansion have pushed debts and deficits in many advanced ity is fundamental.and some developing countries to unsustainably high lev- Quality trade-offs. The risk that lending preparation (toels. While fiscal or monetary stimulus may still be needed rebuild a project pipeline that has been depleted as part ofin some countries, policies need to reestablish sustainable the crisis response) and supervision (of a now-larger stockmacroeconomic conditions. Growth will depend on, among of cumulative commitments) may, under an essentially flatother things, the quality of public expenditures, where the administrative budget envelope, crowd out critical analyticWorld Bank can be valuable—for example, through more and advisory work—with adverse consequences for theregular Public Expenditure Reviews. quality of future lending—needs to be carefully managed.Public-private synergies. A key policy task is to ensure a Coordination. The premium on partnership and coordi-smooth transition of demand from government to the pri- nation is particularly high at times of market uncertainty.vate sector. At the same time, there is a widespread need to Moreover, financial and capacity constraints make coordi-strengthen government capacities to regulate private sector nation with external partners—and the focus on selectedactivities effectively. The private sector, as the main engine areas where the Bank Group has comparative advantage—of growth, will need to be supported through policies, regu- imperative. A significant part of the Bank Group’s responselation, and access to finance. These reforms should not be has taken place in the context of partnerships with the IMF,left for later stages of crisis response. regional banks, and others, but the challenge remains to Executive Summary | xix
  22. 22. sustain and deepen cooperation. Strong internal coopera- the sustainability of the global recovery. This situation— tion, to capitalize on unique linkages across public and pri- together with the greater focus than in the past of condi- vate sector spaces, will also be important. tionality based on a few prior actions, with country owner- Focus on results. A sharp focus on results, which incorpo- ship—places a premium on ensuring clear and measurable rates longer-term structural change, is critical when Bank objectives, M&E, and Bank Group commitment to imple- lending is at an all-time high and concerns persist about ment corrective actions.xx | The World Bank Group’s Response to the Global Economic Crisis

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