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International Development Association in retrospect: IDA’s performance as a channel for concessional development aid

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1982
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Shahid Javed Burki and Norman Hicks

After increasing for a number of years, the flow of concessional assistance to the developing countries declined during fiscal year 1982, both in real terms and in terms of the proportion of gross national product (GNP) of donor countries. This happened in part because of the sharp drop in commitment authority allowed to IDA, the “soft” window of the World Bank. IDA had expected to receive US$4.1 billion during fiscal year 1982; instead it was provided with only $2.7 billion.

This drop in concessional flows and IDA’s resources occurred at a time when the developing countries—in particular those with annual per capita incomes of less than $410—were faced with a very difficult economic situation. It is hard, if not impossible, to project how much low-income countries will “need” in the next decade. It seems likely that the more aid given, the more rapid progress will be, although the results of aid may not be evident until years later. IDA has been one of the more successful instruments of assisting the low-income countries. A recently completed study by Bank staff examines the performance of IDA over the first two decades of its existence.

This article is based on a longer study, IDA in Retrospect. Published by Oxford University Press for the World Bank, IDA in Retrospect is available, in English, at US$17.95 or £14.50 (cloth) and US$6 or £4.25 (paper). Copies are also available in Arabic, French, German, Japanese, and Spanish at US$6 (paper). The publication can be ordered from the Bank’s Publications Distribution Unit (see inside cover for ordering details).

Establishment

In July 1944, representatives from most of the world’s major powers met at the Bretton Woods conference to agree on the principles of a postwar international financial system. While the outcome was the creation of the International Monetary Fund and the World Bank, the financing of development efforts was not a major concern. By the 1950s, however, once European recovery was underway, more attention was paid to it. The expansion of the Bank’s membership to include the newly independent countries underlined its relevance. The prevailing theory of development was that low-income countries, with their high population growth rates and low savings rates, did not have the domestic resources required to boost investment and, hence, output and per capita incomes. They needed foreign capital.

The Bretton Woods agreements had supposed that finance for development would come either directly from private investors or via private capital funneled through the World Bank to productive, revenue-producing projects. The money was to be spent on imports of capital goods and would be limited—it was believed—only by the availability of sound projects. The developing countries, however, needed to strengthen their infrastructure as well—not only ports and railways but also human skills and administration. The benefits of such investment would be slow to mature and were not always going to produce revenues of their own. Since such projects were not attractive to private investors, they could be of potential interest to the World Bank. However, many projects—in education, health, and nutrition, for example—yielded benefits that could not be exported immediately and converted into the hard currency needed to repay Bank loans. Furthermore, the Bank could not lend to countries that were deemed un-creditworthy without jeopardizing its own ability to borrow in capital markets. Many of the poorest countries were, therefore, excluded from Bank lending, and needed concessional aid in order to develop.

Throughout the 1950s, these and other issues on the financing of development were actively debated. In the United States, a report to President Harry S. Truman in 1951 concluded that some important projects could not be financed entirely by loans. The report recommended the creation of an International Development Authority, managed by the Bank and receiving and making grants. This view gained considerable support in the United Nations, which called for an Authority that could eventually make grants of $3 billion a year largely to finance industrialization. The idea continued to be debated and refined, reemerging as a proposed Special United Nations Fund for Economic Development, and eventually IDA was established as an affiliate of the World Bank.

IDA’s final Articles of Agreement were drafted in January 1960 and the Association came into being in September, with the agreement of 80 per cent of the developed country members. The new Association was intended to be an integral part of a broader international framework. A “… healthy development of the world economy and balanced growth of international trade,” stated IDA’s Articles of Agreement, will be “conducive to the maintenance of peace and world prosperity. …” The acceleration of economic development in the less developed areas was seen as in the interests of the international community as a whole. The role of the Association was to promote development through the provision of “… finance to meet their important developmental requirements on terms which are more flexible and bear less heavily on the balance of payments than those of conventional loans …” thereby furthering the objectives of the Bank itself. IDA had emerged as a facility that allowed the Bank to make project loans in countries not suitable for normal Bank loans. By using the same staff and procedures as the Bank, donors were assured that the same high standards would be applied and that the concessional nature of the finance provided would not affect the quality of the projects chosen.

The creation of IDA was an important landmark in the history of international economic relations in at least three ways. It strengthened efforts to establish a multilateral system of world trade and payments; it made poverty a major formal concern of the world’s richest nations; and, at the international level, it institutionalized concessional finance to promote economic development.

Financing and allocation

The Association began with funds of just under $1 billion; since 1965, its resources have been replenished six times, making a total of about $30 billion by the end of 1980, equivalent to over $40 billion in 1981 prices (Table 1).

Table 1IDA resources1(In millions of U.S. dollars)
Original

amount
In 1981

dollars
Initial7573,128
Replenishments
IDA-1 (Fiscal years 1965–68)27452,844
IDA-2 (Fiscal years 1969–71)1,2713,466
IDA-3 (Fiscal years 1972–74)2,4414,495
IDA-4 (Fiscal years 1975–77)4,5016,200
IDA-5 (Fiscal years 1978–80)7,7328,688
IDA-6 (Fiscal years 1981–83)12,00011,204
29,44740,025
Source: World Bank data.

This excludes some contributions by countries in their own currencies, which are not available for commitment.

Bank fiscal years ending June 30.

Source: World Bank data.

This excludes some contributions by countries in their own currencies, which are not available for commitment.

Bank fiscal years ending June 30.

The replenishment of IDA was never very easy, being dogged by the problem of burden sharing and by delays in payments by the United States. Over the years, the share of the United States and the United Kingdom—originally IDA’s two largest donors—declined substantially, as a number of other countries picked up the burden these two countries had assumed at the time of IDA’s inception (Table 2). Other issues that have complicated replenishments include the adjustment of voting rights, the maintenance of the value of contributions against changes in exchange rates, the balance of payments impact of IDA contributions, and the allocation of IDA’s funds. In spite of all this, IDA continued to grow rapidly in size.

Table 2Contribution of major donors to IDA resources 1961–83(In per cent)
Initial

(1961–64)
IDA-1

(1965–68)
IDA-2

(1969–71)
IDA-3

(1972–74)
IDA-4

(1975–77)
IDA-5

(1978–80)
IDA-6

(1981–83)
United States42423839333127
United Kingdom17131213111110
France7886655
Germany710910111113
Canada5666664
Japan4656111015
Italy2444444
Nordic Group44107776
OPEC11186
Others21178910710
100100100100100100100
Source: World Bank data.—Indicates zero.

Organization of Petroleum Exporting Countries.

Others are small countries in the OECD’s Development Assistance Committee group and developing countries.

Source: World Bank data.—Indicates zero.

Organization of Petroleum Exporting Countries.

Others are small countries in the OECD’s Development Assistance Committee group and developing countries.

Today, it is a major component of total concessional flows. Over the last 20 years, the volume of official aid has increased significantly, as have the number of donors and the share of aid going through multilateral channels. Official development assistance more than doubled in real terms between 1960 and 1980 (chart). The share going through multilateral channels has increased from 13 per cent to 28 per cent. In 1980, 9 per cent of all assistance, and about 30 per cent of multilateral assistance, went to IDA.

Net official development assistance (ODA), 1960, 1970, and 19801

Source: Development Assistance Committee.

1 Net ODA means total disbursement minus payments by the recipients.

During its first two decades, IDA committed $27 billion to finance about 1,300 projects in 78 countries. Although IDA disbursements remain small compared with the Bank’s—$2.1 billion versus $6.4 billion in 1982—the Bank receives larger debt-service payments. Net of these, the Bank and IDA transfer about the same amount of resources: in 1982, $2.4 billion by the Bank versus $1.9 billion by IDA.

IDA’s overall purpose to assist development has remained unchanged since 1960, as have its criteria—that the recipient should have per capita incomes below a certain level; a lack of creditworthiness and, consequently, difficult access to commercial borrowing; acceptable economic performance; and loanworthy projects available. However, there have been important shifts in its operations and the economic background against which it functions. The needs of the low-income countries for concessionary finance have remained sizable; since 1973, particularly, changes in the international environment have made these needs even greater. Nevertheless, low-income countries have made real progress. Their per capita incomes have grown, albeit slowly; literacy and life expectancy have increased. To date, 27 countries have developed to a point where they are no longer eligible for IDA assistance. These “graduates” include Indonesia, the Republic of Korea, Tunisia, and Turkey. As more countries have graduated, IDA has been able to devote itself increasingly to the poorest developing countries, mainly in sub-Saharan Africa and South Asia. In 1980, 80 per cent of IDA’s net disbursements were to countries with per capita incomes under $410, while these countries only received 34 per cent of bilateral resources.

Applying IDA’s criteria to potential recipients has required considerable judgment rather than the use of mechanical formulae. Regardless of the criteria, small countries (those with populations under two million) tend to receive more on a per capita basis than larger ones. For instance, India’s share of IDA resources has been held to 40 per cent even though it has over half the population of IDA countries (excluding China). Other large countries—Indonesia and Pakistan—have also received less IDA money, in per capita terms, than that made available to the small countries of sub-Saharan Africa.

Projects

IDA projects are generally identical to Bank projects in scope, design, and implementation. Because IDA countries are less developed, however, a larger proportion of IDA lending has financed agriculture and rural development. IDA credits have tended to finance a larger share of total project costs than Bank loans, and this share has been higher in the poorest countries. The remaining share of total IDA project costs (56 per cent) has been financed partly by the recipients and partly by other donors. In general, about 30 per cent of IDA credits has gone to finance local costs—a larger share than in Bank projects, because IDA projects typically involve more local costs.

At its inception, IDA concentrated on infrastructure projects—transportation, power, ports, and the like. As development thinking evolved during the 1960s, it was recognized that agriculture was being neglected in many countries, resulting in food shortages and, where countries could afford it, growing food imports. In the late 1960s, therefore, IDA shifted more resources to agriculture. In 1973, as concern about employment and income distribution grew, the Bank and IDA extended this emphasis to rural development in general. There are also an increasing number of projects intended to raise the productivity of small farmers, as a way of reducing absolute poverty as well as increasing total agricultural output (Table 3).

Table 3IDA lending by sector, 1961–82(In per cent)
1961–701971–761977–82Total
Agriculture and rural development23324237
Basic infrastructure41302930
Energy681613
Transportation30171013
Telecommunications5534
Industry141088
Other infrastructure3476
Water supply and sewerage3354
Urbanization122
Human resource development6677
Education6566
Population, health, and nutrition111
Nonproject lending22318712
100100100100
In millions of U.S. dollars2,8227,26816,64826,738
Source: World Bank data.

Indicates zero.

Includes development finance companies, industry, small-scale enterprises, and tourism.

Includes technical assistance.

Source: World Bank data.

Indicates zero.

Includes development finance companies, industry, small-scale enterprises, and tourism.

Includes technical assistance.

IDA has had many successes. It has helped increase agricultural production in South Asia through projects spreading the technologies of the Green Revolution. As a result of these achievements, India now has the potential to meet its own food needs for the first time in decades. IDA has also been particularly active in financing irrigation facilities and agricultural credit. Over the years, there has been a shift in lending away from large irrigation works to schemes that emphasize improvements in distribution facilities, finance for privately owned wells and pumps, and assistance for on-farm water management.

The agricultural transformation of South Asia is not easy to repeat in sub-Saharan Africa. Countries there are among the world’s poorest in terms of infrastructure, human capital, and agricultural development. In addition, agriculture is almost exclusively rainfed, so that workable combinations of technologies and practices for farmers are harder to devise and involve higher risks. Nevertheless, there are countries, notably Malawi and Kenya, where IDA’s efforts have produced encouraging results. IDA has accounted for roughly 50 per cent of Malawi’s total external assistance and has played a catalytic role in strengthening key development institutions. In Kenya, IDA pioneered small farmer development programs.

IDA has also concerned itself with urban poverty and employment. It has pioneered programs to find affordable solutions to problems of urban shelter. Industrial lending has favored small- and medium-size firms as a way of increasing employment. Water supply projects have increasingly stressed simpler systems. All these changes are part of a general determination to reach the poorest people within poor countries and to design projects that will benefit them directly. Experience has shown that raising the productivity of the poor means more than providing them with productive assets. It also means increasing their skills and strength through education, health programs, and other services. IDA’s lending for education, for example, has moved away from funding secondary and higher levels to a greater emphasis on primary schooling, as well as vocational and technical training.

Effectiveness

One way of measuring the effectiveness of a project-financing institution such as IDA is to assess the rate of return on its investments. For several reasons—weather, government policies, and mistakes in project design and operation—the rates of return expected when projects are appraised often differ markedly from the final results. Overall, IDA’s projects appear to have about the same average rate of return as Bank projects, about 18 per cent. Rates of return—mostly financial or economic rather than social—vary widely between regions, however, averaging 14 per cent in Africa and over 22 per cent in South Asia (Table 4).

Table 4Rates of return for IDA projects by selected regions
Rate of

return

(In per cent)
Number of projectsPercentage

of all projects
East AfricaWest AfricaSouth AsiaTotal1
Negative570168.7
0–96832010.9
10–192416208244.8
20–2961073720.2
30–39226168.8
40 and over024126.6
434540183100.0
Average rate of return13.214.722.517.9
Source: World Bank, Operations Evaluation Department reports.

Includes projects in North Africa, Middle East, East Asia, and Latin America.

Source: World Bank, Operations Evaluation Department reports.

Includes projects in North Africa, Middle East, East Asia, and Latin America.

Although these figures refer only to the limited sample of IDA’s completed projects that have been audited and for which recalculated rates of return are available (about 183 projects), they indicate the risky nature of development projects in low-income countries, particularly in Africa. For instance, while about 15 per cent of IDA’s projects had rates of return over 30 per cent, about one fifth had rates below 10 per cent. While the higher average return suggests a fairly successful record, there have also been a number of failures. However, in pioneering new approaches—such as small farmer development and urban slum upgrading—a certain number of project failures are almost inevitable before a successful design can be developed. And the lessons learned from one region or country are often not suitable for immediate adoption in another country, as experience with the Green Revolution in Asia shows. Projects are also affected by factors outside IDA’s control, such as weather and political disruptions. Some projects experience difficulties because they have been badly designed. IDA at times has been insensitive to sociocultural situations in recipient countries or has provided technical solutions that were inappropriate to local environmental or economic conditions. Other problems often result from the failure of governments to support projects with the necessary price incentives, procurement policies, or financing.

On the other hand, many IDA projects also have important benefits that are difficult to quantify. For instance, projects assist in developing local institutions, in establishing procedures for cost recovery, and in other improvements in efficiency and management. In many cases, IDA has supported the development of institutions that can take over from it the job of lending to individual projects; this has allowed IDA to become more of a wholesaler of credits and has increased the ability of intermediaries to play an independent role in development. This has been particularly true of industrial and agricultural credit. Programs aimed at cost recovery reduce price distortions and reduce the burden of operating expenditures that would fall on the recipient country’s budget. In the past decade, IDA projects have been increasingly successful in designing projects that reach the poor.

What main conclusions can be drawn about IDA’s performance in its 22-year history? Four main results should be highlighted:

  • IDA lending has been effective in promoting development. This is evident not only in the high rates of return on its projects but also from its impact on policy reforms and the development of local institutions. However, it would appear from a review of project experience that IDA’s success is greater in South Asia than in Africa—but lower rates of return on projects in Africa reflect lower levels of institutional development, shortages of trained manpower, and other factors.

  • The Association has demonstrated a tremendous capacity to grow, not only in size but also in understanding through learning by doing. It has gradually shifted its lending to the least developed of the poor countries and to poor people within those countries; it has incorporated the lessons learned from past mistakes into better project designs.

  • Despite a general lack of public understanding of development issues and little broad-based support for aid programs in many developed countries, IDA has been remarkably successful in attracting an increasing amount of financial support. But with its growth, it has also become the subject of closer scrutiny and criticism.

  • Even though many countries have graduated from IDA’s rolls, the need for concessional development assistance remains as great as ever. IDA has a key role to play in laying the groundwork for long-term development in the poorest countries in the world.

IDA’s success in the past notwithstanding, a number of issues remain to be resolved. IDA was established to meet the need of low-income countries for concessional assistance, but how much of this should be borne by IDA has remained an open question. A continuing issue has been the question of how IDA should allocate its resources between various recipient countries. The reentry of China—a potentially large recipient of IDA resources—into the World Bank adds another dimension to the allocation problem, as does the desire to accelerate lending to sub-Saharan Africa. The issue of the terms of IDA lending has surfaced again. Some donors question whether all countries should receive credits on the same terms and whether terms should vary by sector.

These issues—and others—have been with IDA throughout its first two decades. They are apt to be with IDA in the future. It is doubtful that they will be completely resolved to the satisfaction of all IDA’s members. In the past, IDA has been successful because it has managed to meld the differing interests of members into a consensus on policy matters.

Today IDA represents a successful effort in economic cooperation among countries. Over time, it has evolved and adapted to meet the needs of both donors and recipents. Continuing cooperation between both sides will be required in the future if a real commitment to worldwide development is to be maintained.

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