Implications for Multilateral Concessional Windows

countries differently. The majority of developing coun-tries measure poverty in absolute terms, using a poverty line determined by the monetary cost of a predeter-mined basket of goods. In contrast, the majority of OECD countries measure poverty in relative terms, setting the poverty line as a share of the average or median standard of living in a country.

While extreme poverty is projected to shrink, relative poverty may not. Table 3.5 has projected relative poverty by 2025, by drawing a relative poverty line at 60 percent of mean income or consumption. Even as the number of extreme poor population will have been substantially re-duced globally by 2025, most countries will still face siz-able problems with respect to social exclusion and rela-tive deprivation, as measured by relarela-tive poverty lines.

Consequently, eligibility thresholds for concessional finance could be defined as a country´s per capita income relative to per capita income in a specified grouping, such as the poorest five (or six) deciles by GDP per capita where virtually all of the world’s poor live. Alternatively, against the background of the poor people vs poor coun-tries debate, overall levels of extreme poverty (percent of population) compared to LICs may become an eligibility criterion. One approach to better identify relative pover-ty would be measuring GNI in PPP terms, rather than by the Atlas methodology as this would improve its correla-tion with non-income indicators of wellbeing. However, the PPP approach has limitations, in particular related to data availability and methodological issues that remain to be resolved¹³.

IDA itself has suggested and justified the broadening of the operational IDA cutoff, away from the current GNI per capita threshold. “The ultimate objective of IDA’s graduation is for countries to make a successful and last-ing exit from dependence on concessional resources to fund their development finance needs. Reversals back to IDA are costly for both recipient countries and do-nors alike. The fact that one third of past IDA graduates

13 Using PPPs instead of market exchange rates to convert curren-cies makes it possible to compare the output of economies and the welfare of their inhabitants in real terms (that is, control-ling for differences in price levels). The Summary of Results and Findings of the 2011 International Comparison Program (ICP) was published on April 30, 2014. It presents the results of the ICP for the GDP and its main aggregates. It provides several indica-tors including PPPs, real expenditures, and price level indices for GDP and its main aggregates for 199 participating economies.

The ICP 2011 Final Report will be released by the end of July 2014, and will provide detailed results and in-depth analysis of volume and per capita measures with detailed information on methodology and country survey coverage.

The option value of preserving IFIs and their concession-al windows is considerable in a world with globconcession-al gov-ernance failures that prevent first-best policy solutions.

The provision of GPGs – e.g., climate change mitigation – requires the institutional infrastructure that the MDBs can deliver. This holds regardless of how poverty and eligibility thresholds are defined so far. Thus, the feasible, cost efficient, and least disruptive operational options to open the windows of multilateral concessional finance will be discussed next.

4.2 Redefining Eligibility Criteria for Concessional Funds

At present, the multilateral soft-finance windows are all pegged to the IDA “operational cutoff”, which refers to the IDA eligibility ceiling defined by a specific level of GNI per capita (USD 1,195 for FY13). IDA's eligibility threshold was initially based on the “historical cutoff”, which currently would correspond to USD 1,945. That it has been a malleable yardstick in the past can be derived by the fact that “high demand for IDA resources in the early eighties and resource scarcity led to the second and lower operational cutoff in IDA8 (1989)” (IDA, 2013).

In any case, most observers would agree with Jonathan Glennie´s verdict: “The LIC-MIC cutoff point is arbitrary and stingy” (Glennie, 2014). Strategic avenues to redefine or replace the present IDA cutoff are i) adopting another poverty paradigm, or ii) complementing the existing IDA cutoff with other indicators.

Currently, eligibility for concessional finance is rooted in the Absolute Poverty Paradigm (Schlögl, 2013), which in turn seems to be justified by the “basic needs” perspec-tive, which considers aid as a merely transitional help for self-help. Sumner (2013b) offers some suggestions of conceptualizing eligibility thresholds that would stay within the Absolute Poverty Paradigm: average incomes compared to the international poverty lines (USD 1.25 and USD 2 per capita per day); or the overall “burden” of poverty, meaning the total poverty gap as a percentage of GDP; or structural indicators as initially suggested (1963) in a broad basic-needs approach by Dudley Seers (aid dependency, FX reserves, GDP in agriculture or export dependency on primary sectors).

By contrast, the Relative Poverty Paradigm would require eligibility to be determined by a threshold relative to, say, other countries´ income. Garroway and de la Iglesia (2012) have emphasized that international comparisons of poverty have long treated affluent and developing

receive transitional support during IDA17 in the amount of two-thirds of the eleven percent of IDA17 resources that India would have received had it not graduated from IDA, on terms that are harder than those for IDA hard-term lending but below the fixed rate equivalent of an IBRD loan.

It is not unrealistic to expect that concessional finance during the transition may in practice also be provided by bilateral donors eager to fill the gap left by a withdrawal of multilateral soft lending. After all, Stefan Klasen and his team have produced evidence that bilateral aid stimulates donor export earnings from the recipient countries (Nowak-Lehmann et al., 2013). To be sure, given the commercial stakes involved, a transition approach coordinated by bilateral and multilateral donors seems difficult to achieve.

Séverino and Moss have suggested creating an IDA+ tran-sitional window between IDA and IBRD. In IDA+, conces-sional resources would be made available to countries whose incomes fall between the current IDA threshold and twice this threshold. The suggested IDA+ threshold can be justified on historical and economic grounds:

first, the historical threshold is close to twice the cur-rent threshold for IDA (and other windows´) eligibility.

Second, the IDA+ threshold would align with estimates from Martin Ravallion (2009) who has found that there is a natural cutoff at about USD 2,000 per capita between countries that can feasibly reduce poverty through redis-tribution and those that would face prohibitively high marginal tax rates on the rich.

IDA (2013) has recently proposed three criteria to gov-ern access to transitional support from IDA: (a) GNI per capita below the historical threshold at the time of graduation (which is similar to the Séverino-Moss IDA+

threshold); (b) a significant poverty agenda, as measured by poverty levels and other social indicators; and (c) a significant prospective reduction in available financing from the WB after graduation from IDA. Such support would thus be made available for new graduates that meet these three criteria and would help smooth the transition of graduating countries where access to WB financing is constrained.

Allocation under the transitional window might be con-ditioned (or earmarked) on, and thus directed toward, public spending for social inclusion and redistribution as well as improved fiscal federalism, i.e. higher fiscal trans-fers from rich to poor states.

reversed back to IDA and that of these only three have since re-graduated to IBRD-only status highlights the volatility and fragility of the development progress in these countries. From IDA´s perspective, this raises the broader question of whether the GNI per capita crite-rion could be complemented by alternative measures to more fully capture a country´s poverty profile” (IDA, 2012). Possible complements to consider – besides using relative or absolute poverty thresholds – would be the United Nations (UN) Human Development Index (HDI) or one of its sub-indices, the inequality-adjusted HDI, or the Multidimensional Poverty Index.

The mainstreaming of climate change into multilateral aid will imply assessing vulnerability which is indepen-dent of present policy, needed both, to iindepen-dentify the most vulnerable poor countries and to design criteria for the allocation of international resources. Two kinds of vul-nerability and the corresponding indices can be consid-ered: structural economic vulnerability (as measured by the UN Economic Vulnerability Index, EVI) and Physical Vulnerability to Climate Change Index. These concepts are addressed in more detail below (section 5.2). Note, however, that the use of alternative indicators to better inform eligibility decisions presents significant imple-mentation challenges, including timeliness and compa-rability of other available data sets, such as the UN HDI.

4.3 Smoothing Transition Periods

Section 3 has demonstrated that the projected graduates from operational eligibility still mostly remain below the historical eligibility cutoff in 2025, including the most populous countries in South Asia and Sub-Saharan Africa, India and Nigeria. Consequently, a further im-portant strategic option to consider is to soften the transition from IDA-only via blend to IBRD-only status.

Séverino and Moss (2012), for example, qualify the cur-rent IDA process as unnecessarily “bimodal” as the new graduates not only lose access to highly concessional financing but are required to double the repayments on their outstanding loans. However, some smoothing hap-pens in practice through the use of blended and hard-ened terms.

A significant prospective drop in WB resources to India after graduation (almost USD 4bn, see IDA, 2013, Figure 4) – the result of India having reached its Single Borrower Limit and contractual acceleration of its IDA credit re-payments – has led to the provision of exceptional transi-tional support in the IDA17 period (IDA, 2014). India will

those IFIs where the MICs have relatively more voice in governance and lending decisions.

A more poverty-focused cooperation between MICs and IFIs might be supported by the new WB Country Engagement Model and Country Partnership Framework (CPF) aiming to selectively focus WBG operations to-wards achieving the goal of eradicating extreme poverty and reducing inequality in a sustainable manner by 2030.

The WB Country Partnership Strategy for India shifts support significantly to low-income states, where most of the poor live, and is the institution’s first country strat-egy to set specific goals on reducing poverty and increas-ing prosperity.

For further potential models of sub-sovereign allocation, the donor government might want to explore to what extent the European Union (EU) experience can be trans-ferred to multilateral windows. EU Structural Funds and the Cohesion Fund are the financial instruments of EU regional policy, which are intended to narrow the devel-opment disparities among regions and Member States.

Since 2000, more than EUR 500bn in Structural Funds (mostly via the European Regional Development Fund) have been channeled to local projects in the EU Member States via various national intermediary institutions.

These intermediaries, typically government ministries at the regional level, select and monitor local projects.

The reallocation of Structural Funds across local projects by regional governments has been surrounded by con-siderable controversy in recent years however, as there is robust evidence that sub-state governments’ electoral concerns distort the local allocation of Structural Funds (Dellmuth and Stoffel, 2012). The EU evidence warns also that it will be necessary to ensure that sub-sovereign allocations would be additional to existing levels of transfers from central governments of federated states.

Finally, sub-sovereign default will be another matter to be dealt with.

4.5 Opening the Windows for Global Public Goods

As part of the post-2015 development goals, a UN Secretary General’s High Level Panel recently recom-mended that building disaster resilience be made a target under the new headline goal on ending poverty. In line with such recommendations, another important alter-native to withdrawing concessional finance from MICs would be co-financing regional and global public goods.

The mandate of the MDBs could be adapted to focus Access of UMICs to transitional windows might be made

contingent on project types and measured progress of countries´ tax efforts. For example, public spending for social redistribution, for internal fiscal transfers to poorer regions and for GPGs could be envisaged for preferen-tial access to transitional windows. Likewise, measured progress in deleting gaps in local tax efforts would be a negotiated prerequisite for allocation under the transi-tional window.

4.4 Introducing Sub-Sovereign Allocation

MDBs could increase providing direct funding in grants or credits to local governments or even nongovernmen-tal organizations in regions with per capita incomes be-low country-level eligibility thresholds, even if the coun-try’s average income level is above the threshold.¹⁴ Apart from the traditional rural-urban duality of inequality in populous large emerging countries (such as Brazil, China, India or Indonesia), disaster-related impoverishment ap-pears to have distinct within-country geography.

In particular India needs to be treated as a cluster of separate sub-national entities as an ODI (2013) study identified some states causing considerable concern, in-cluding Assam, Madhya Pradesh, Odisha, Uttar Pradesh, and West Bengal. IDA (2013) points to seven low-income states in India (with their population exceeding half a billion) whose state level GDP falls below the India aver-age and that comprise 44 percent of India’s population but 59 percent of the poor population: About 211 mil-lion poor people live in the low-income states, some with more than 100 million people, such as Bihar and Uttar Pradesh, with MDGs such as maternal mortality rates largely unmet.

In case of graduation, rather than simply disengaging from such MICs, donors might envisage the application of country thresholds to sub-national units and so would work in low-income provinces of MICs (Sumner, 2013b).

The idea would be to cooperate on inclusive policy processes such as budget allocations, spatial patterns of economic growth to improve prospects for more inclu-sive development. However, MIC governments might interpret such cooperation as excessive interference into domestic political processes. Such concerns might weigh relatively less for cooperation with multilateral than with bilateral donors, and within the multilaterals space for 14 This is already happening in practice (e.g., India does

back-to-back lending from IDA to federal government to states).

– Greening MDB projects. By using concessional finance to encourage low-carbon economic output, MDBs could continue carrying out their poverty alleviation mission but commit to doing it zero-carbon by spe-cifically financing low-carbon developments such as energy efficiency and a sustainable-energy sector with concessional finance. MDBs could thus contribute to the green-growth agenda while maintaining their poverty mandate and country-allocation systems.

Green MDB projects will cause additional costs as it is more expensive to build a climate-friendly wind park than a conventional, fossil-fuel power plant of the same capacity, for example. Softer lending conditions could also apply according to the degree of the “mar-ket failure”, such as low investment returns and lack of demand.

Such proposals are likely to encounter resistance. First, there is opposition to entrust the regional development banks (and development agencies) with GPGs, for the fear that such an assignment might further tilt the in-centives of our political leaders toward ignoring climate change and other global public ills¹⁷. Second, funding for GPG-related benefits tends to be viewed with skepticism by partner governments as they worry that correspond-ingly less money will be made available for conventional poverty reduction. This concern of “aid diversion” has some empirical support derived from bilateral aid pat-terns (Reisen et al., 2004)¹⁸. Third, the above propos-als place the geography of “greening growth” in poor countries while climate change and other disasters were caused by early developers in advanced countries. The last objection can be attenuated by putting the emphasis on disaster mitigation.

17 Inge Kaul, who was one of the first to mainstream the critical importance of enhanced provision of GPGs for reducing pov-erty, has recently criticized tapping ODA funds for provisioning GPGs, such as climate-proofing, an issue for which advanced countries have prime responsibility. See Kaul (2014).

18 Reisen et al. (2004) found an offset coefficient between GPG-related ODA and traditional aid at 25 percent, which confirmed partner concerns that GPG-devoted ODA was not entirely ad-ditional but partly reduced funds for poverty reduction.

explicitly on infrastructure with upfront cost but long-term developmental benefits as a way to help sustain global economic growth and human welfare. Tracer sec-tors could be climate change mitigation and disaster risk prevention and management.

Section 3.4 has provided evidence for eleven 2025 IDA graduates (India and Bangladesh top the list) with greater than USD 100 million prospective annual disaster dam-age costs. Disaster risk mandam-agement can be integrated with poverty eradication efforts; absent this alignment, the target of ending poverty may not be within reach.

Consequently, regardless whether or not the more op-timistic end-of-poverty scenarios will materialize, it is suggested that the soft-finance windows of multilateral institutions target projects to deal with natural disasters and poverty simultaneously. There is, thus, no need for the MDB mandates “to move beyond preoccupation with poverty eradication” (Linn, 2013). MDBs could thus con-tribute to the green-growth agenda while maintaining their poverty mandates and country-allocation systems¹⁵. Two modalities can be realistically envisaged to open the multilateral soft-finance windows for GPGs:

– Turning MDBs into global/regional public goods facilities, as has been suggested by the CGD-housed The Future of IDA Working Group (Séverino and Moss, 2012)¹⁶. The facility would either replace or operate alongside traditional concessional finance disburse-ment, to tackle global problems of particular relevance to poor countries, even if the expenditure has to take place outside of those countries. Such an approach would take advantage of existing replenishment mechanisms and leverage the MDBs´ role as a man-ager of international funds. It may also be a way to engage new donors from the MICs. The CGD proposal faces the challenge to move from a performance-based to a structural-indicator allocation mechanism, however, as will be discussed in section 5.2.

15 A similar strategy has been recently suggested by Feil et al. (2013).

16 Note that addressing regional and global public goods is not an entirely new mandate for MDBs.

The division of labor between the various windows should be guided by some principles, such as compara-tive advantages for allocation efficiency, region-specific challenges and ownership by recipients and donors, including emerging donors. The uncertainty of poverty outcomes, the increasing exposure to shocks and the likely rise of interest rates over the coming decade should lead to a strengthening of insurance components – an area for which the IMF seems best positioned. The global challenges of climate change need to be assigned fore-most, but not exclusively, to a global institution, whence the IDA seems best suited. The move from sovereign to sub-sovereign allocation will be most needed in South Asia, and is thus of particular importance for the ADB.

The division of labor between the various windows should be guided by some principles, such as compara-tive advantages for allocation efficiency, region-specific challenges and ownership by recipients and donors, including emerging donors. The uncertainty of poverty outcomes, the increasing exposure to shocks and the likely rise of interest rates over the coming decade should lead to a strengthening of insurance components – an area for which the IMF seems best positioned. The global challenges of climate change need to be assigned fore-most, but not exclusively, to a global institution, whence the IDA seems best suited. The move from sovereign to sub-sovereign allocation will be most needed in South Asia, and is thus of particular importance for the ADB.