The Country Policy and Institutional Assessment (CPIA) and Allocation of IDA Resources

Suggestions for Improvements to Benefit African Countries

This paper recommends that the World Bank distribute its assistance to Africa in more equitable ways. On August 16, 2010, it was presented to the African Caucus of Finance Ministers, Central Bank Governors, and World Bank and IMF Executive Directors in Freetown, Sierra Leone. The Caucus established a Task Force to advocate that the World Bank implement the recommendations.

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Executive Summary

As innocent victims of food, fuel, and finance shocks, African countries warrant higher levels of grants and highly concessional funds to meet their essential spending needs, make progress toward the MDGs, and respond in a counter-cyclical way to the sputtering global economy without deepening their debt difficulties.

The CPIA should help African countries achieve these goals. The World Bank uses the CPIA to rate the policy and institutional performance of its approximately 135 IBRD and IDA recipient countries. (See Attachment A for CPIA policies.) But, the CPIA is not used to allocate assistance to IBRD countries; it is only used for this purpose in the 79 countries eligible for IDA assistance. The CPIA has numerous limitations, including:

An Unproven Premise. There is little evidence to show that the CPIA serves its intended purpose: to help improve policies and institutional performance in order to achieve growth, poverty reduction and aid effectiveness.

One-size-fits-all Design. The CPIA assumes that the same set of policies will advance aid effectiveness, poverty reduction, and growth in all countries. By designing a second set of indicators for Post-Conflict Countries (the Post-Conflict Performance Indicators (PCPI)), the Bank acknowledges that different challenges merit different measures of performance. Ideally, the Bank would have country-specific indicators because “good” policies vary by the country, its stage of development, and its circumstances. Experts and authorities contest many of the CPIA’s “ideal” policies.

Undercutting Democratic Practice. By promoting one set of policies, the CPIA poses a risk to globalization and democracy because it shrinks national governments’ capacity to respond to the policy preferences of their electorates. Lack of responsiveness to citizens creates political instability and builds opposition to governments and the globalization process.

Lack of Responsiveness to Africa’s Unique Priorities. The CPIA does not adequately address issues that are vital to Africa’s future, including: economic vulnerability to powerful exogenous shocks; MDGs; agriculture; manufacturing; and environmental challenges (e.g., mitigation of and adaptation to climate change). Unfortunately, the use of the CPIA results in lower allocations for countries with low levels of human development or low levels of progress (or regression) relative to the MDGs.

Double Standards: The West and the Rest. The richest countries in the world have been unable to achieve many of the “ideal” policies specified by the CPIA. If the World Bank used the CPIA to rate the financial and economic management performance of the US and many European governments, these countries would receive the CPIA’s lowest possible rating (e.g. for risk management, oversight and supervision of the financial sector; budget imbalances; and debt levels).

Double Standards: The IBRD vs IDA. The Bank treats IBRD countries differently than IDA countries in two ways. The CPIA scores of IBRD countries are not publicly disclosed or used for allocation purposes, as they are for IDA countries.

Subjective Rating Process. The African Development Bank (AfDB) and the World Bank use the same CPIA criteria to assess the performance of the same African countries. Yet, the country ratings of the AfDB are higher than those of the Bank for most of the 16 CPIA criteria. (See Attachment D.) Why? Have average AfDB scores shown stagnation in most areas of performance, as IDA scores have? Does IDA cluster the ratings of African countries in such a small range (2.5 to 3.5) that it is not possible to discern progress?

Aid Concentration. Two-thirds of IDA’s assistance to Africa goes to only six countries. (See Attachment B for IDA Commitments and Disbursements to each African country.) Also, assistance to fragile states is highly concentrated in a few countries – the “donor darlings.” Fragile states that are not longer eligible for post-conflict allocations generally experience a sharp drop in their allocation. Countries should be treated fairly. (See Attachment B for a list of commitments and disbursements to each African country.)

In addition, the allocation process fails to take into account the extent to which donors and creditors other than the World Bank provide financing to each recipient government, so precious IDA resources are disproportionately allocated to donor “darlings.”

Complexity and Lack of Transparency. The IDA allocation system is complex, with eight factors that, in addition to the CPIA, determine a country’s IDA allocation. (See pp. 14-15.) Given this complexity and the fact that the CPIA is built on confidential data, it is not possible for outsiders to verify the results. This undermines the credibility of the allocation process.

With these problems in mind, the paper makes recommendations that relate to:

• The Performance-Based Allocation (PBA) system (which includes not only CPIA, but also each country’s portfolio performance (e.g., rate of disbursement of IDA assistance), GNI per capita, and population – together with a base allocation)
• The CPIA used to rate all IDA countries other than “post-conflict” states
• Special Provisions for small, indebted and post-conflict countries – the Post Conflict Performance Indicators (PCPI)
• Transparency and Participation in the PBA system

1. Change the PBA system in the following fundamental ways:
a) Diminish the population exponent of the allocation formula to ensure more equitable distribution of grants and credits to African countries; and
b) Include each country’s rating on two indices: the Economic Vulnerability Index (EVI) and the Human Assets Index (HAI). By so doing, it would acknowledge the major role of external shocks to the prospects of African countries, which would advance progress toward the MDGs and lead to more equitable IDA allocations for countries, including those fragile states that are not eligible for special allocations.

2. Eliminate use of the CPIA, per the recommendation of the 2009 Evaluation of the CPIA by the World Bank’s Independent Evaluation Group (IEG). After revising the CPIA indicators, the IEG states that “the Bank could continue to produce and publish the separate CPIA components, since this would allow for country specificity.”

If the use of the CPIA is not eliminated, revise it in ways summarized below:

a) Economic Management (CPIA Cluster A). Revise these CPIA criteria to support goals including: sustainable growth, attainment of the MDGs, heightened agricultural and manufacturing productivity, domestic resource mobilization, and environmental sustainability. Expand access to affordable credit for production and employment; raise the domestic tax base; foster agricultural growth in crops for domestic consumption; and provide incentives for intra-regional and South-South trade that can lead to greater structural diversification of the economy. Policies should enable countries to spend most aid, as opposed to absorbing it.

b) Structural Policy (Cluster B). Balance liberalization and regulation in ways not done before the global financial crisis. The Trade Indicator should not include specific tariff targets and should reward increased levels of intra-regional and South-South trade; the Financial Policy Indicator should be completely revised (pp. 16-17); and, in the Business Regulatory Environment Indicator, the “ease of hiring and firing” measure should be eliminated, as it appears to violate Bank policy.

c) Social Inclusion/Equity and the Environment (Cluster C). Include an assessment of “equity and equality of opportunity to disadvantaged groups” in the CPIA; re-orient the indicators so that countries with low levels of progress toward the MDGs will not have their allocations reduced; ensure that government policy encourages compliance with all core labor standards, not just one, as is currently the case; revise the “environmental sustainability” criterion to take into account a broad array of environmental sectors and give this criterion more weight.

d) Governance (Cluster D). Reduce the weight of this cluster in the CPIA from 68% to 50% (the weight of the cluster in the AfDB’s CPIA) or less. The current weighting punishes African countries and creates volatility in aid allocations.

In addition, the CPIA should:
e) Include Outcome Indicators in the CPIA in order to: 1) significantly expand policy space; 2) respond to the evidence that there is no one correct definition of “good” policies; and 3) counter the fact that the CPIA lacks country-specificity. New Outcome-Based Indicators should reward progress toward achieving the MDGs, expanding employment; heightening agricultural and manufacturing productivity; improving food security; and fostering mitigation of and adaptation to the challenges of a warming climate.

3. Change Allocation Parameters for Small, Fragile, Post-Conflict, and Indebted States

a) PCPI. Advise the World Bank about the proposed content and weighting of the Post-Conflict Performance Indicators. (See Attachment A.)

b) Support for post-conflict countries. Augment the support for post-conflict countries (those that are not donor darlings) -- to at least 5 years with a 10 year phase out.

c) Support for small countries. Double the base allocation and eliminate the per capita allocation ceiling.

4. Expand Assistance to Indebted Countries

a) Netting out. Encourage the IDA Deputies to re-open the discussion about whether or how to deduct or “net out” debt relief under the Multilateral Debt Relief Initiative (MDRI). Africans should urge them to eliminate the MDRI netting-out entirely.

b) Redistribution of compensatory resources. Reject the proposal to redistribute compensatory resources on a performance basis. Distribute them the basis of vulnerability and need.

5. Claim Rights to Participation in and Ownership of the CPIA

a) Participation. Arrange for routine participation in the CPIA process by government authorities and civil society before ratings are finalized.

b) Ownership. Ensure that the PRSP (or other country strategy) guides the goals of assistance rather than the CPIA.

6. Enhance Transparency. Make the CPIA data and methodology public so that the ratings can be replicated by others, thus enhancing its credibility.