Development Policy Finance (DPF) is being widely used for purposes of Covid-19 response and recovery. By conditioning general budget support on the implementation of prior actions, DPF aims to nudge countries towards policy reforms. The nature of the instrument and the opacity around how reforms are agreed risks undermining countries’ democratic ownership in policy reforms. It also shows shortcomings in supporting a just recovery from Covid-19, by promoting reforms that can have adverse social and gender impacts. This panel will discuss these shortcomings, including drawing from country case studies, and suggest ways to deal with them.
- Moderator: Elaine Zuckerman, Gender Action, President.
- Panelist 2: Chiara Mariotti, Eurodad, Senior Officer,
- Panelist 1: Jon Sward, Bretton Woods Project, Environment Project Manager
- Panelist 3: Marc Pascual, Reality of Aid, Global Coordinator
- Panelist 4: Stephane Guimbert, World Bank Group, Director of Operations Policy and Country Services
- In newly published Eurodad research, we see increasing number of prior actions prescribing institutional reforms that can facilitate fiscal adjustment following an IMF loan. It is a very visible trend: DPF encouraging fiscal adjustment.
- A lot of prior actions are focused on SMEs. This is a positive thing. However, the majority of measures that were recommended were tax relief measures. These are good in the short term for SMEs, but there was no clear tendency of using these measures to structurally change the tax structure of each country in a more progressive way.
- We found a lot of emphasis on reforms that pushed for the participation of the private sector in public utilities. In Benin, the govt was recommended to absorb the losses of a Canadian company that was managing public electricity, due to the fact that they couldn’t increase the tariff during the pandemic.
- Transparency is emphasised a lot in DSOs. But we need to see more transparency on World Bank operations.
- Report published today by the BWP, “Learning lessons from the C-19 pandemic: the World Bank’s macroeconomic policies and women’s rights”.
- DPF sits outside of the Bank’s environmental and social framework. This means it is not governed by the same level of scrutiny of Bank loans. The last DPF retrospective happened in 2015.
- DPFs are supposed to assess the impact of prior actions on poverty and social consequences. Our research suggests that this process is insufficient in safeguarding against impacts on women.
- Case study: Ecuador. In 2019 the WB approved a $500m DPF. This included prior actions related to cutting the budget and reforming national labour laws. The DPF called for government to reduce its approved budget by 6.3% from 2017 to 2021. One of the impacts of these reforms was a significant reduction in the size of Ecuador’s public health service – in 2019 4.5% of health employees were dismissed from the Ministry of Public Health, with women over-represented in this sector.
- We question the extent to which this report was based on evidence. The 2018 Systematic Country Diagnostic was positive about public-sector led growth and had suggested that fiscal consolidation would “dampen economic growth”.
- We see a wider trend in development policy finance that promotes fiscal advice and macroeconomic reforms that are likely to impact women and girls particularly.
- Investigating the case of DPLs in Philippines. Starting in 2007, prior actions focused on fiscal reforms that created new markets for businesses and expansion of VAT.
- A liberalization on rice tariffs destroyed the rice industry, particular effecting small rice producers, by flooding the market with imports.
- Philippines received 4 DPLs from March 2020 onwards. Of these, only one was focused on C19 response. When we look at the prior actions, only 6 of the 28 were directly related to C19 response. It makes you wonder why the World Bank is pushing prior actions not related to the crises at this urgent time. Most of the prior actions are focused on business reforms/opening up markets.
- In Indonesia, the World Bank has been providing DPLs since 2004. Indonesia is commended in the World Bank’s Doing Business Reports for its reforms, including a recent Omnibus Law. This law relaxed labour regulation and environmental protection standards, removed the requirement to maintain 30% of the watershed as forest area, and exempted mining companies from paying royalty as long as they develop downstream facilities such as coal fired power plants
- During the crisis, the focus of DPOs has been different to what we had during the global financial crisis. DPF were built on policy dialogues in each country, though lockdowns have made dialogue more complex.
- As we saw in the pandemic, DPFs give countries quick access to finance. We have seen countries increasingly spending significantly and DPFs have helped.
- DPOs are important in a crisis, but DPOs are also important in general for policy reforms to encourage growth. Our retrospective reports are a good opportunity for introspection – we are close to finalizing the latest version. Four highlights from the retrospective:
- The DPF has evolved quite a lot over the last 30 years. They have a high development impact.
- DPFs have a significant role in fighting climate change.
- DPFs are important for resilience
- They also matter for inclusion. On gender, DPOs have helped to promote reforms on gender inequality and they have integrated gender aspects – 70% of DPOs have gender actions, compared to less than 25% just 5 years ago.
How is the WB going to ensure that WB policy reforms around lower taxes for corporations and higher energy tariffs will not boost the profits of fossil fuels and thereby incentivize new fossil fuel investments?
- Stephane: this is a great question and a complex one. There are a number of reasons why we have been supporting the removal of fossil fuel subsidies. As many know, often these are not targeted at the people who need it most. As much as I would like to see it as consumer support, it is not a way of using resources that benefit the most vulnerable. We try to pair with expansion of safety nets. On the increasing of tariffs, for the energy transition we need to see more investments in renewal/sustainable sources of energy. I will concede to you that the removal of the subsidy and increase in tariff are not in themselves a full strategy for what needs to happen in terms of moving away from carbon emitting sources of energy. They should be seen as a broader set of packages.
Stephane, you reacted to some of the gender concerns raised, but I would stress that the BWP publication highlighted the problem with impact of WB’s general macroeconomic policies on gender. Second, if the Bank is committed to borrower-led development, why are prior actions necessary? Can anything be shared on what the Bank’s new approach will be to assessing business environments? Will it assess the DBR approach and the harm it has caused over the years?
- Stephane: I didn’t get a chance to read the report. We will look into it. Your point is well taken. This is not only about the specific prior actions but also the broader macro framework. We can certainly look at the question in Ecuador and if by supporting the macro framework there were adverse implications.
- We have learned of the important of country ownership over the years. But we believe it is important to have a focus of the conversation around a few select changes in policeis and institutions. The prior actions are a way to focus. On selected prior actions, we want to be systematic in analysis of the issues at hand.
- On Doing Business, I do not have a specific process to outline. But it will not be a quick rebranding. Not only where there recent concerns about governance, but also concerns about the broader methodology and the way Doing Business was undertaken.
Following from the question on why prior actions are needed – I think it is not that civil society doesn’t see that there is always going to be a dialectic. The problem is that the WB always come from the same position – one of a relationship of power where at the end of the day the Bank has the most bargaining power.
On the DBR scandal, it is really worrying. The DBR has been a pillar of how the Bank has driven and designed policy advice and conditionality. Now we are being told that the process was ridden with manipulation and conflicts of interest. We need to hear that this will be reviewed – not just the DBR but how the Bank does its research and conditionality. Considering all this, what can we expect to change in the medium term in the Bank?
- Stephane: To challenge a bit on your point on the power relationship. I have been responsible for particular DPOs. I certainly didn’t feel that I was in the position of power when speaking to Ministers of Finance. That is where the quality of the ownership, which does not come just through the DPO consultation, it is a range of issues around which there are many opportunities to discuss with the authorities and partners. In some DPOs it is done better than others. But in general there is ownership of DPOs.
- On DBR, it will take some time to reflect. But we will reflect from the lessons of Doing Business for other types of research.
- A key question is indeed the sequencing of these different actions. We don’t always support the safety nets through DPOs, but you are right that one of the challenges is to expand the safety nets whilst making sure that they remain affordable. They also have to be well targeted and adaptable as situations change. We work quite closely with the IMF on questions related to this.
- There are some products that really are owned by the WBG, products that we will lead engagement on. One is the country partnership framework. Another is the country climate and development reports. On the other hand, DPOs are led by the governments. Our role is to support the consultation of the governments for the reform of these programmes.
- I fully agree that stabilizing a utility that is primarily focused on sources of energy that are not sustainable is not something that we should favour. It’s the case in Indonesia but happens elsewhere as well. We are looking carefully that we don’t do anything contrary to our objectives but also that we found the right tools for engagement.