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A new OED study identifies factors that have influenced the Bank's operations in six Pacific Island countries, and draws lessons from experience that may help enhance the effectiveness of the Bank's service to these countries. It concludes that the Bank can potentially play an important role in helping the Pacific Island countries to prepare and implement appropriate development strategies. The recent expansion of economic and sector work is a key input into this process. There may also be scope for a more active program of direct lending in some of the countries, even though overall lending levels are likely to remain low. The cooperative arrangement with the Asian Development Bank (ADB), which was a feature of the lending program during the 1980s, is no longer relevant. But a suitable division of labor between the World Bank and the ADB is still needed, so as not to overburden the countries or send them mixed signals on policy and institutional reforms. The Bank will also need to allocate dedicated staff resources to support an expanded program along these lines.
Background
The Pacific island countries have severe natural resource constraints because of their small size, geographic dispersion, and narrow economic base. In relation to their economic size, they have received high levels of external aid. But despite this support, their growth during the 1980s remained quite sluggish. This poor performance has given rise to legitimate concerns, both within the countries and among donors, about the effectiveness of aid and about the countries' administrative capacities and policy environments.
At the time of the study, the six Pacific Island Member Countries (PMCs) of the World Bank were Fiji, Kiribati, Solomon Islands, Tonga, Vanuatu, and Western Samoa. Lending from the Bank Group to these six countries, since they became members, totals $216 million, including $138 million of IBRD loans to Fiji and $78 million of IDA credits to the other countries. In annual average terms, the Bank Group's lending during 1980-90 amounted to $11 per capita, ranging from the low of $5 per capita for Tonga to $22 per capita for Western Samoa; Kiribati has not yet borrowed from the Bank.
Much of the Bank's lending to these countries has been governed by the Bank's cooperative arrangement with the Asian Development Bank. Under this arrangement, signed in 1980, ADB has taken the lead role in preparing, processing, and implementing projects. To date, 13 out of 19 Bank-financed projects in the smaller PMCs have been cofinanced with ADB. In Fiji, however, ten of the 12 projects have been financed directly by the Bank.
Main findings
The Bank was generally unable to contribute effectively to the development of the PMCs during most of the 1980s. Except in Fiji, resource transfers from the Bank to the PMCs were very small, compared with flows from other donors--which were primarily of grants--and with Bank transfers to other small island countries. More importantly, there was often no clear country strategy for the selection of projects. The Bank's small project portfolio has been too diverse to provide the framework for coherent, integrated development in the region. With some exceptions--for example in Fiji and in power and telecommunications-- project design was far from satisfactory and implementation presented serious problems. The Bank was unable to make effective use of project lending for policy reforms in the countries. Its program of economic and sector work (ESW) was piecemeal and failed to support its lending operations or policy dialogue.
While the ADB arrangement has provided administrative savings the benefits to the PMCs are less clear. The selection and design of projects has generally not been underpinned by appropriate country strategies and ESW. It has been time consuming and sometimes difficult to harmonize policies and procedures. This has led to delays in project approval and disbursements. The Bank, in practice, did not give up fully its responsibility for cofinanced projects. Yet the limited contact with the PMCs appears to have weakened country relations.
The Bank reassessed its strategy toward the PMCs in the mid-1980s. The revised strategy includes an expanded ESW program, and centers on a series of regional economic reports that address development strategy and policy issues. Studies in progress cover the key sectors of transport, energy, education, and health and should provide the basis for preparing sectoral strategies. These studies will help strengthen the Bank's policy dialogue with the PMCs. However, the Bank's ESW program has not yet had a major impact on the Bank's lending operations.
ADB has also expanded its role in the Pacific in recent years, and its regional office in Vanuatu has been enlarged. At a recent DAC meeting, donors agreed that ADB would provide the background country-based analysis for UNDP-sponsored aid groups. The regional reports of the Bank (to be discussed at the Forum Secretariat's Pacific Island Countries/Donors Meetings) need to be closely linked to the ADB's country analysis.
Issues for the future
In future, most of the external financing for the PMCs will continue to come from bilateral donors. Resource transfers from the Bank are expected to remain small. With a limited lending program, the Bank could act as a "lender of last resort", focusing on priority areas in the development programs of the countries. However, the major role for the Bank as a multilateral agency will be to help the countries prepare and implement appropriate development strategies. Under these conditions, the Bank faces two basic choices:
- Maintain the present arrangement with ADB, but extend it to cover economic and sector work. In this case, the lead role should clearly be played by ADB, which would assume full responsibility for appraising and supervising projects. The present arrangement would not only need administrative changes to make it work more smoothly, but also some harmonization of policies and practices between the two banks, to improve the benefits to the PMCs.
- Develop a more active program for direct lending as well as economic and sector work in the PMCs. Cofinancing of projects would not be necessary. However, considering the interests of the countries, the Bank and ADB would need to reach an understanding on an appropriate division of labor by country and sector. This option would require the Bank to allocate more staff time, especially for project and country strategy work, and to make necessary organizational changes, including a core group for the PMCs.
On balance, the second option would be preferable, provided it is backed by a clear understanding with ADB on a suitable division of labor that will avoid overlap and duplication. There is otherwise a risk of both burdening the countries with unnecessary work and sending them mixed signals on policy and institutional reforms.
Decisions on the Bank's future role in the PMCs must be taken in close consultation with the governments of the PMCs, ADB, and other donors. The overriding goal would be to enhance the effectiveness of the Bank's service to the countries. Whatever choices are made now should be reviewed after a period of about three years' experience.
Box: The Country Department Responds
The OED Review presents a sobering assessment of the Bank's role in the South Pacific during the 1980s. Overall, the management agrees with the findings of the review.
IDA's involvement in four of its Pacific member countries (Solomon Islands, Tonga, Vanuatu and Western Samoa) has largely been indirect, through the special cofinancing arrangement with the ADB. In other Pacific member countries, the Bank has had a long-standing direct program in Fiji, Kiribati has not wished to borrow and the Marshall Islands has only recently joined the Bank Group. In the late 1980s, the Bank strengthened its ESW program and took a more direct role in project lending in response to a weakening pipeline of projects for cofinancing and a preference by some member countries for a more direct relationship.
The Country Department is reviewing the Bank's strategy of assistance to its Pacific members. Discussions have been initiated with member countries and major donors to develop a more fundamental understanding of the Bank's role with regard to aid coordination, policy dialogue and lending. The future Bank strategy will be shaped, in particular, by the Bank's comparative advantage in providing policy advice, the form and level of aid flows to the region, the continuing difficulties in achieving effective aid coordination, and the need for the Bank to maintain a direct relationship with each member country. The revised strategy plan is to be completed in FY93.
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