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Africa: What Next for the World Bank's Concessional Finance Arm? (This is Africa)

November 6, 2012
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Vice president of programs and senior fellow Todd Moss and research assistant Stephanie Marjerowicz discuss the future of IDA at the World Bank in this piece for This is Africa.

The following article originally appeared in This is Africa.

Drastic changes in the supply of and demand for the World Bank’s concessional finance mean that IDA’s purpose, tools, and broader role within both the international aid system and the World Bank Group need to be reconsidered.

Fifty-two years after its creation, the International Development Association (IDA), the World Bank’s soft loan window, is facing a watershed moment. Drastic changes in the supply of and demand for the World Bank’s concessional finance mean that IDA’s purpose, tools, and broader role within both the international aid system and the World Bank Group need to be reconsidered.

Even under conservative assumptions, IDA will face a wave of likely client graduations over the next 10 ro 15 years. Nearly all of IDA’s biggest and best-performing borrowers—including India, Vietnam and Ghana—are approaching or have passed the income threshold for eligibility and will soon transition out of IDA. By 2025 IDA’s client base will be much smaller, more fragile, and almost entirely African, with major implications for its operational model and its relationship with other multilateral development institutions.

Global circumstances are also changing. Most of the world’s poor now live in middle-income countries. Aid budgets are tightening, and the need for financing global public goods is increasingly clear. An IDA created more than half a century ago may not be ideally suited to this new set of development challenges.

Instead of lobbying for ever-increasing replenishment envelopes and tweaking at the margins, World Bank shareholders and management should push for bold and creative ideas to modernize IDA. The IDA-17 talks, which begin informally during the IDA-16 midterm review next month, should begin a hard-headed appraisal of IDA’s purpose, systems, and financing.

Last fall, the Center for Global Development convened a working group on the future of IDA to examine how these changes in clientele and the global environment will affect IDA’s core business, and to think through some of the options for adapting IDA to its new challenges. The group's report, "Soft Lending without Poor Countries: Recommendations for a New IDA", was released last week and lays out the challenges and puts several new ideas on the table.

To adapt IDA to the new world, the Bank will have to rethink and redesign its products. Plain vanilla loans to national governments may not be effective tools to tackle climate change or address pockets of poverty in middle-income countries.

And if the Bank is looking to promote the private sector, a place to start would be to end the practice of subsidizing IDA with profits from the International Finance Corporation (IFC), the private sector arm of the World Bank. Instead, IFC income could be deployed via an IFC venture fund with a specific mandate to be aggressive in IDA countries.

If IDA is to be successful in post-conflict and fragile countries—a majority of its client base by 2025—it will need innovative approaches with more effective feedback loops. This will require rethinking the current allocation system, especially to find better ways to create positive incentives for countries at the low end of the performance spectrum. And as IDA’s client base becomes almost exclusively African, the World Bank will also have to rethink its relationship with the African Development Bank. Current ad-hoc arrangements will become insufficient as their client bases converge.

World Bank presidents have frequently defined their success through ever-larger replenishment campaigns, but this is no longer an appropriate expectation. The wave of approaching graduations means that IDA replenishments could shrink while maintaining (or even increasing) per-capita IDA allocations to the remaining countries. Shareholders and the incoming leadership should not be afraid to declare success and, despite their bureaucratic instincts, even allow IDA to shrink. They must focus on modernizing IDA’s mandate and business model rather than obsess over the size of its coffers.

The World Bank has so far proven to be one of the most effective and efficient institutions for tackling poverty and other global challenges. The Bank's shareholders and its management need to act now to ensure it continues to be relevant in the 21st century.

Read it here.