The international depression of the 1930s was one of the deepest and most persistent ones in history. It was so bad that it brought Hitler to power in Germany, and led the United States of America to shelve its laissez-faire ideology. There was no relief from it; but then, World War II intervened and lifted all economies. The leaders of Allied Powers were well aware of this, and as the War approached its end, they worried about the return of depressions. In 1944, their representatives met in Bretton Woods to find a solution. They came to the conclusion that before the War, countries got into two types of crises: first, a sudden crisis arising from the loss of international confidence, which led to the exodus of capital; and second, a payments deficit and lack of reserves that ruled out domestic demand stimulus. So they devised two solutions: cheap, short-term loans for sudden crises, and long-term loans to shore up the balance of payments while a country tried to stimulate its economy. They pooled together funds for both, and gave them to two new international organizations, the International Monetary Fund and the World Bank. Later they found they had forgotten equity investment to aid enterprise, and attached International Finance Corporation to World Bank for the purpose.
This development finance architecture worked fairly well till the 1980s; big, poor countries like India and Brazil routinely got into payments crises and provided good business to the three fund providers. They also gave rich fodder to liberals like me, and I made a good living ridiculing socialist India's stupidity.
But then, India abandoned planned investment and fixed exchange rate in 1991-93, and reneged on its promise to have frequent crises. Sundry countries such as Japan, Germany and China ran enormous payments surpluses, which found their way into international financial markets and competed with the Fund and the Bank for borrowers. And financial markets in New York, London and Frankfurt diversified into loans to previously untouchable undeveloped countries. The Fund and the Bank lost business, and were relatively inactive for some years.
The World Bank had for 67 years stuck to two major types of loans: loans to countries to finance development, and loans to finance specific investment projects. In search of new business, it devised a new instrument in 2012, which it called programme-for-results (PFR). It gives part of the finance required for projects undertaken by existing institutions. In other words, it has gone out of the business of institution-building. It looks at extant institutions, selects those that it thinks can deliver results, and leaves them to run projects, which it funds in part. In this way, it has got out of country risk and institutional risk, and it concentrates on getting results. Before the inauguration of this instrument, the World Bank took responsibility for the proper use of its funds and policed projects it funded appropriately, by means of reports from the government, inspections and delegation of its own staff to projects. In PFR, it funds projects only after satisfying itself that the country has devised a satisfactory supervisory mechanism, it monitors the mechanism instead of the project itself, and it disburses the money only after it sees the results, which it calls disbursement-linked indicators (DLIs).
These DLIs are by no means simple or measurable. The experts the World Bank engaged classified DLIs into six types: inputs, such as purchases of supplies; outputs, such as road mileage; outcomes, such as proportion of children reaching a certain standard of education; actions, such as preparation of a guide; system actions, such as institution of a management system; and system outcome, such as improvement in timely construction of bridges.
By mid-2016, the World Bank had financed 46 PFR programmes. In Morocco, for instance, it is funding urban transport services; its chief criterion of judgment is, how quickly passengers can reach their destinations. In Egypt it is funding subsidized housing for the poor; there too one of its criteria is, what proportion of the poor can travel to work in less than 60 minutes. In Bangladesh, it is helping the government introduce value added tax; there its criteria are the coverage of the tax, the proportion of taxpayers who pay online, and encouragement of voluntary, proactive disclosure. In Nepal it is financing the repair of bridges on national highways, but also asking for the creation of a bridge supervision system which would repair them quickly and keep them in good condition. In Rwanda it is supporting a comprehensive agricultural development plan; amongst the criteria it is using is yields of coffee and cassava, and milk output per cow. In Croatia it aims to reduce smoking, faster recovery of patients in intensive care in hospitals, higher reimbursement of drugs, and reduction in the proportion of adults suffering from hypertension.
In India it has funded three programmes. The biggest of all is the Prime Minister's favourite Swachh Bharat programme: it has committed $1.2 billion to reduction of open defecation. It has also invested in water supply to rural homes in Maharashtra, and to training teachers and monitoring their performance in Bihar.
So, how much difference has PFR made? An assessment by Center for Global Development staff shows that there was no programme where there was a single DLI - measure of success or trigger. Their number varied between 4 and 13. All cases required multiple monitoring. India's open defecation programme, the biggest taker of resources, was monitored by outcome; if it was excluded, the commonest DLIs were related to output, system action, action and system output in descending order.
The main difference PFR has made is that it has involved the beneficiary governments in measuring and judging their own performance; often, other donors are also involved. But it is not clear, and will not be for some years, whether the shifting of responsibility on governments to improve their monitoring system leads to permanent changes or just enough temporary changes to make the World Bank happy. Meanwhile, most of the World Bank money is still channelled into projects and policy-based loans; so in effect, PFR is a matter of choice for the governments. It is not a permanent or compulsory reform. But 80-90 per cent of the clients were satisfied with the programmes, and said that they would take more PFR finance.
In a way, the World Bank has tried out a practice common in lending by private banks, which also set out sequences of achievement criteria before they hand out a loan. It is not so common in external finance for governments; and here, the World Bank is only one of many finance suppliers. Hence PFR will be effective only if it spreads to governments of industrial countries that assist poorer countries, of which the most important are USA, the European Union and China. It is these to which the World Bank should be selling PFR if it wants to make a difference. Meanwhile, PFR could make a difference to the World Bank's style of internal management; that would certainly be worth pursuing. It should seek out and indoctrinate a few governments of rich and poor countries, and create a club of those who think as it does and are prepared to experiment.
