2004
Country Ownership Undone: to Set Policy Directions of Borrowing Governments, the World Bank Uses “One Size Fits All” Scorecard – the “Country Policy and Institutional Assessment” (CPIA)

edited report

Nancy Alexander
Citizens’ Network on Essential Services

Table of Contents

I.                    Introduction to the CPIA

A.      What is the CPIA?

B.      How does the CPIA affect lending levels?

C.      What does the CPIA rate?

D.      Is there a plan to disclose CPIA ratings?

E.      What is the structure of the CPIA rating system?

F.      How is the CPIA used to allocate funds to low-income countries?

G.   What are some of the controversies around the Bank’s role in rating country performance?

H.   What happens when a government flunks the CPIA?

I.    Does the CPIA actually signal success?

J.    How does the CPIA determine operational policies of the World Bank?

K.       How can the CPIA Undercut Sovereignty?

L.        Conclusion

II.         Country Policy and Institutional Assessment (CPIA) Ratings for 2003

A.      Eastern Europe/Central Asia

B.      Latin America and the Caribbean

C.      Africa

D.      South Asia/East Asia/the Pacific

E.      Middle East/North Africa

III. Rating Criteria

A.      Economic Management

B.      Structural Policies

C.      Policies of Social Inclusion and Equity

D.      Public Sector Management and Institutions

Box: Candidates for the U.S. MCA Get Broad Range of Scores from the World Bank

  Figure: IDA Country Performance Rating

I.                    Introduction to the CPIA

A. What is the CPIA?

Every year, the World Bank rates the quality of client countries’ policies and institutions with an instrument called the “Country Policy and Institutional Assessment” (CPIA). The Bank carries out this rating for about 100 countries. CPIA ratings are secret for about 20 countries; they are not even disclosed to other multilateral and bilateral institutions. For about 80 other countries, the Bank discloses selected (and partially aggregated) CPIA ratings.

The World Bank uses individual country ratings as diagnostic tools to help allocate its (loan and grant) resources among borrowers[1] and determine the policy thrusts of new operations.

B.      How does the CPIA affect lending levels?

The World Bank rates each government’s performance by the extent of its compliance with the World Bank's definition of "good policies." In 2002, the Bank allocated about three times more money to governments that were "A students” than to "F students.”

C.      What does the CPIA rate?

According to the Bank, the purpose of the CPIA is to measure a country’s policy and institutional development framework for poverty reduction, sustainable growth and effective use of development assistance.[2] Another view is that the CPIA rates the extent to which a government has: a) adopted neoliberal economic policies (i.e., liberalization and privatization in the context of strict budget discipline) and b) developed the effectiveness and stability characterized by mature political, social, and economic institutions.

The overarching institutional strategy of the World Bank Group is its Private Sector Development (PSD) Strategy.[3] The PSD Strategy expands the privatization “frontier” into basic services -- health care, education, water and energy – especially in poor countries. Pursuant to this Strategy, CPIA-derived policy prescriptions are focused on promoting the private sector. (The IMF, World Bank, and WTO define the “private sector” as including both for-profit firms and not-for-profit agencies or NGOs.)

D. Is there a plan to disclose CPIA ratings?

Not yet. In October 2003, The Bank’s management proposed a general CPIA disclosure plan to its Board of Executive Directors that involved a gradual phasing-in period. In an initial stage, management proposed that the CPIA be disclosed to multilateral and bilateral development partners. At the same time, management proposed that the Bank should only publicly disclose the CPIA after borrowing governments are thoroughly educated about the scoring system. During this stage, Bank staff would discuss current CPIA ratings with governments. Bank staff may discuss a government’s CPIA ratings with governments that are performing well, but only rarely will such discussions take place with governments that are performing poorly.

The opinions of Board members about the proposed CPIA disclosure policy are “all over the map,” including those who want:

Many Bank borrowers are adamantly opposed to release of the CPIA, such as the Governors of the World Bank from Africa. The twenty higher-income countries with secret CPIA ratings, such as Brazil, will probably maintain that secrecy. However, low-income countries may have little choice about whether their scores will be released or not.[4] This exacerbates the double standard between less and more prosperous countries and violates the provision of the Articles of Agreement calling for equal treatment of borrowing countries.

E. What is the structure of the CPIA rating system?

The CPIA rates countries primarily on the basis of current performance in relation to twenty criteria that are grouped into four categories.

• Economic management, including management of inflation and current account; fiscal policy; management of external debt; and management and sustainability of the development program.
• Structural policies, including trade policy and foreign exchange regime; financial stability and depth; banking sector efficiency and resource mobilization; competitive environment for the private sector; factor and product markets; and policies and institutions for environmental sustainability.
• Policies for social inclusion, including gender equity and equality of economic opportunity, equity of public resource use, building human resources, safety nets; and poverty monitoring and analysis.
• Public sector management and institutions, including property rights and rule-based governance; quality of budgetary and financial management; efficiency of revenue mobilization; efficiency of public expenditures; and transparency, accountability, and corruption in the public sector.

F. How is the CPIA used to allocate funds to low-income countries?

The World Bank’s staff uses a formula to divide up the funds available for low-income countries that includes “need” (income per capita) and “performance.” The CPIA is an important input in calculating a government’s performance rating. The criteria are weighted as follows:

1) The CPIA (comprised of the four categories listed in part “E”) accounts for 80% of a government’s overall rating;

2) The Bank also rates each government’s performance on the portfolio of outstanding loans. This rating counts for 20% of a government’s overall rating. It measures how well a government manages its loan resources, including how it achieves timely disbursement through efficient procurement practices.

3)       Finally, the level of grants and loans to which a borrowing government has access will then increase or decrease as a result of the Bank’s application of a “governance factor” to its overall score. [5] The governance factor is the average of seven governance-related criteria that are already in the CPIA and the portfolio performance ratings. Hence, governance criteria are effectively double counted in the final rating. In recent years, the application of a governance factor has reduced the allocation to about twelve countries by as much as 50%.[6]

Figure: IDA Country Performance Rating

 Source: “Allocating IDA Funds Based on Performance.” International Development Association, March 2003.

G. What are some of the controversies around the Bank’s role in rating country performance?

While the CPIA measures past performance of borrowing governments, its rating criteria also represent implicit “one-size-fits all” policy prescriptions. The World Bank offers a government a programmatic (adjustment) loan to addresses weaknesses in government performance as assessed by the CPIA.

The World Bank’s Country Assistance Strategy (CAS) for each country identifies the need and rationale for these adjustment loans. The CAS outlines prospective Bank investments over a medium-term (e.g., three-year) time horizon for each borrowing country. [13] Each CAS stipulates which policy actions, or “triggers,” the government must take to gain access to a higher-level of resources or to prevent losing access to resources.

In some cases, when governments fail to comply with World Bank (or IMF) policy conditions, donors and creditors may terminate assistance to an entire sector or country. They also suspend debt relief when a government (e.g., Nicaragua, Benin, Mali, Chad, and Nigeria) fails to expedite specified market reforms, such as privatization.

CAS triggers are largely determined by the CPIA. A 2003 Bank paper stated that the main policy prescriptions included in the CAS are: “increasingly focused on aspects of the CPIA that are shown to be weak. The triggers can also include policy targets from PRSP, to the extent that they are expected to strengthen policy and institutional performance.”[14] Hence, the CAS may reflect different priorities than a government espouses.

K.      How can the CPIA Undercut Sovereignty?

The IMF and World Bank require that each low-income country prepare a Poverty Reduction Strategy Paper (PRSP) — a three-year “national development strategy” — in order to qualify for external financing and debt relief. In preparing a PRSP, governments often solicit input from a wide variety of domestic constituencies.

The IMF and World Bank promised that the PRSP would provide a framework to set forth a government’s own priorities to guide operations financed by donors and creditors. However, the sovereignty of governments is compromised because:

• the institutions have broken this promise. In practice, the World Bank’s CPIA can be more influential than the PRSP in shaping key economic policies in borrowing countries. The World Bank will require a government to remedy weaknesses in its CPIA rating in order to qualify for more financing or debt relief. Moreover, the IMF dictates the framework and the resource “envelope” for the priorities identified by a PRSP.
• donors and creditors (which often adopt CPIA priorities) play a leading role in preparation of PRSPs (more prominent than parliamentarians). The process of formulating PRSPs can displace more “homegrown” policy-making processes.[15]
• CPIA-related policy prescriptions can override the policy priorities of citizens and elected officials. Indeed, these constituencies usually lack knowledge of their government’s CPIA ratings and the implications of those ratings for public policies.

L. Conclusion

In general, country “ownership” of the development process is a mirage, except where countries are large and can take an independent stand. Such countries, like China, often borrow significant sums from the IFIs and lack crippling debt burdens.

Donors and creditors dominate the policy-making of low-income countries more than ever before. The CPIA represents a policy straightjacket. No matter what a country's own development strategy (or Poverty Reduction Strategy Paper) says, a country is likely to adhere to CPIA-derived policy prescriptions if it expects to retain external support. Governments are in a double bind if citizens and elected officials choose a path other than that specified by CPIA priorities.

As noted, the PRSP is supposed to be the “roadmap” for achievement of the MDGs, which aim to halve the number of people in poverty by the year 2015. However, the influence of the CPIA over the PRSP (among other things[16]) underscores the lack of ownership that governments have over their own development future. Moreover, the achievement of MDGs significantly depends upon whether the neoliberal policy preferences embedded in the CPIA can help overcome poverty and deprivation. There is much more evidence to rebut this causal connection than to support it.[17] Accordingly, it is legitimate to ask who is responsible for achieving the MDGs: governments which, if they wish to maintain external support, are pressured to adopt policies derived from CPIA ratings; or the donors and creditors that drive the development process “from behind”?

The CPIA rating system undercuts democracy in borrowing countries by constraining the policy choices available to citizens and their elected officials. If donors and other multilateral creditors adopt the CPIA rating system, then a policy cartel wielding most aid and credit will have an even more profound consequence for democracy and development.

The CPIA straight jacket is one indicator of the increasingly ideological approach to policy-making. Harvard Professor Dani Rodrik stated that, “The broader the sway of market discipline, the narrower will be the space for democratic governance… International economic rules must incorporate “opt-out” or exit clauses [that] allow democracies to reassert their priorities when these priorities clash with obligations to international economic institutions. These must be viewed not as 'derogations' or violations of the rules, but as a generic part of sustainable international economic arrangements." Occasionally, such exits from obligations are possible for large borrowers from the IMF and World Bank, but the institutions discriminate against low-income countries.

The Rodrik approach is minimalist insofar as it would allow governments to opt out of commitments which they made, freely or under duress, to the IFIs. However, the ideal --so often proclaimed and so little practiced -- would invite governments and their citizens to authorship as well as ownership of their national strategies.

To put these heretical ideas into perspective, one might reasonably ask what kind of CPIA rating industrialized country governments might receive? Developing country governments aren't given the same flexibility that their wealthier counterparts claim for themselves when determining whether or when to liberalize, privatize or exercise greater budgetary discipline. For instance, if the US and EU were subject to CPIA review, their current fiscal policies would result in austerity measures that are politically unimaginable. From blatant protectionism, to market distorting subsidies and ballooning deficits, everyday policies of the governments that control the IFIs reveal a shocking double standard that makes a mockery of national sovereignty for most of the world’s countries.

II. CPIA Ratings for 2003[18]

This section presents CPIA ratings from Borrowing countries in all of the Bank’s geographic divisions. About 20 countries with CPIA ratings do not appear, because of their ratings are secret. The Bank discloses each country’s overall rating, as well as ratings for each of the five broad categories from which the overall rating is derived. The five ratings are those for: economic management, structural policies, policies for social inclusion and equity, public sector reform, and portfolio performance. For each of these ratings, the Bank applies numerical ratings from 1 (low) to 6 (high). The charts in this paper convert these numbers to only five “letter” grades. The reason for presenting the data in this way is that the Bank itself places each country in one of five quintiles based upon the CPIA performance score. While the letter grades are therefore not perfectly precise representations of the numerical scores, they are still highly indicative.

A. Europe/Central Asia

B.      Latin America and the Caribbean

C.      Africa

D.      South Asia/East Asia/ the Pacific

E.      Middle East/North Africa

III. Rating Criteria[19]

Using a numerical scale (from 1 to 6), the Bank rates each low-income country government on twenty criteria. The 2002 version of these criteria are summarized as follows. Few changes have been made in the 2003 version.

A. Economic Management

1) Management of Inflation and Current Account. Countries with the highest rating (6) have not needed a stabilization program for 3 years or more. Countries with the lowest rating (1) have needed, but have not had, an acceptable program for 3 years or more.

2) Fiscal Policy. Countries with high ratings have fiscal policies that are consistent with overall macroeconomic conditions and generate a fiscal balance that can be financed sustainably for the foreseeable future, including by aid flows where applicable.

3) Management of External Debt. Ratings take into account the existence and amount of any arrears; whether and how long the country has been current on debt service; the maturity structure of the debt; likelihood of reschedulings; and future debt service obligations in relation to export prospects and reserves.

4) Management and Sustainability of the Development Program. This question assesses the degree to which the management of the economy and the development program reflect three elements: technical competence; sustained political commitment and public support and participatory processes through which the public can influence decisions.

B. Structural Policies

5) Trade Policy and Foreign Exchange Regime. This item assesses how well the policy framework fosters trade and capital movements. Countries with a high grade have low (10% or less) average tariffs (weighted by global trade flows) with low dispersion and insignificant or no quantitative restrictions or export taxes. There are no trading monopolies. Indirect taxes (e.g., sales, excise, surcharges) do not discriminate against imports. The customs administration is efficient and rule-bound. There are few, if any, foreign exchange restrictions on long-term investment capital inflows.

6) Financial Stability and Depth. This item assesses whether the structure of the financial sector, and the policies and regulations that affect it, support diversified financial services and present a minimal risk of systemic failure. Countries with a low rating have high barriers to entry and banks’ total capital to assets ratio less than 8%. Countries with high scores have diversified and competitive financial sectors that include insurance, equity and debt finance and non-bank savings institutions. An independent agency or agencies effectively regulate banks and non-banks on the basis of prudential norms. Corporate governance laws ensure the protection of minority shareholders.

7) Banking Sector Efficiency and Resource Mobilization. This item assesses the extent to which the policies and regulations affecting financial institutions help to mobilize savings and provide for efficient financial intermediation. Countries with high scores have real, market-determined interest rates on loans. Real interest rates on deposits are significantly positive. The spread between deposit and lending rates is reasonable. There is an insignificant share of directed credit in relation to total credit. Credit flows to the private sector exceed credit flows to the government.

8) Competitive Environment for the Private Sector. This item assesses whether the state inhibits a competitive private sector, either through direct regulation or by reserving significant economic activities for state-controlled entities. It does not assess the degree of state ownership per se, but rather the degree to which it may restrict market competition. Ideally, firms have equal access to entry and exit in all products and sectors.

9) Factor and Product Markets. This item addresses the policies that affect the efficiency of markets for land, labor and goods. Countries with high scores limit any controls or subsidies on prices, wages, land or labor. Remaining controls are consistently applied and explicitly justified on welfare or efficiency grounds.

10) Policies and Institutions for Environmental Sustainability. This item assesses the extent to which economic and environmental policies foster the protection and sustainable use of natural resources (soil, water, forests, etc.), the control of pollution, and the capture and investment of resource rents. Macroeconomic and fiscal policies foster sustainable resource use and environmental stewardship. Fees and charges create incentives for efficiency; there are no subsidies encouraging overuse of resources. Water and sanitation services have wide coverage and are financially sustainable. There are clear property rights and transparent mechanisms for allocation of concessions and quotas. Laws and policies on resource use and pollution control are in place and are implemented by credible regulation, monitoring and enforcement. The private sector and civil society participate in setting environmental priorities and finding solutions.

C. Policies for Social Inclusion and Equity

11) Gender. This item assesses the extent, to which the country has created laws, policies, practices, and institutions that promote the equal access of males and females to social, economic, and political resources and opportunities. These laws may concern, e.g. inheritance, land transfer or ownership, residency, contracts, employment, financial services, education, etc. Countries with high scores have legal systems (as written and applied) that provide equal access to assets, credit and markets to women and men. The government has adequate policies and institutions to implement these laws fairly and enforce them effectively. Policies provide for equal access to education, training credit, markets, or the labor force. Policies also provide for a high degree of personal safety for all – notably women and girls.

12) Equity of Public Resource Use. This item assesses the extent to which the overall development strategy and the pattern of public expenditures and revenues favors the poor. National and sub-national levels of government should be appropriately weighted. Countries with high scores have public expenditures for social services that benefit the poor more than the better-off. The government is designing appropriate targeted programs with participation of individuals, groups, or localities that are poor, vulnerable or have unequal access to services and opportunities. The overall incidence of revenues is progressive.

13) Building Human Resources. This item assesses the policies and institutions that affect access to and quality of education, training, literacy, health, AIDS prevention, nutrition and related aspects of a country’s human resource development. It assesses the policy and institutional framework affecting public, private and individual actors. Countries with high scores have involved the public and affected groups in shaping appropriate priorities and a strategy to build the country's human resources. Relevant macroeconomic and sectoral policies and budgets are consistent with these priorities. The roles and responsibilities of the various levels of government and of the government, voluntary and private sectors are appropriate to implement the policies.

14) Social Protection and Labor. Government policies reduce the risk of becoming poor and support the coping strategies of poor people. Safety nets are needed to protect the chronically poor and the vulnerable. The needs of both groups are important, but in countries where the chronically poor remain inadequately protected, an unsatisfactory score (2 or 3) is warranted. Countries with high scores have regulations that assure: equity in the labor market; protection of basic labor standards; affordable insurance schemes; incentives for financial savings for old age or disability; microsavings and microfinance; social safety nets; community-driven development projects; and labor market programs such as public works or job training.

15) Poverty Monitoring and Analysis. This item assesses both the quality of poverty data and its use in formulating policies. "Quality" encompasses: timeliness, reliability and coverage (by geographical areas, gender and relevant socioeconomic dimensions, such as race, caste or religion). Countries with high scores regularly conduct nationally representative household surveys covering consumption/income, social indicators, access to social services, etc. The data are timely, widely accessible and disaggregated by gender and socioeconomic groups. The data are analyzed within the country to monitor trends in poverty indicators and the impact of key projects and programs. These analyses are systematically used to inform policy decisions and program design.

D. Public Sector Management and Institutions

16) Property Rights and Rule-based Governance. Countries with high scores have a rule-based governance structure. Contracts are enforced. Laws and regulations affecting businesses and individuals are consistently applied and not subject to negotiation.

17) Quality of Budgetary and Financial Management. This item assesses the quality of processes used to shape the budget and account for public expenditures. It also addresses the extent to which the public, through the legislature, participates in the budget and audit processes. Ratings should cover both national and subnational governments, appropriately weighted.

Countries with high scores have budgets formulated through inter-ministerial and legislative deliberations. The budget covers all or most fiscal operations. The budget is implemented, as planned, and actual expenditures deviate only slightly from planned levels (e.g. by less than 5% on most broad categories). Audits of public accounts are carried out and submitted to the legislature in a timely way, and there are sanctions for negative audit opinion.

18) Efficiency of Revenue Mobilization. This item evaluates the overall pattern of revenue mobilization, not only the tax structure as it exists on paper, but revenues from all sources, as they are actually collected. Countries with high scores generate the bulk of revenues from low-distortion taxes such as sales/VAT, property, etc. Top corporate and personal tax rates are in line with international levels. The base for major taxes is broad and free of arbitrary exemptions. Tax administration is effective, cost efficient and entirely rule-based.

19) Efficiency of Public Expenditures. This item assesses the extent to which the desired results of public programs are clearly defined and the available resources are used efficiently to achieve them. National and sub-national governments should be appropriately weighted. Countries with high scores specify the expected results of public programs. Performance is reported and influences budget allocations. Public servants' compensation is adequate (e.g. at least 75% of comparable private sector compensation) and their hiring and promotion are competence-based. Line agencies have flexibility to make operational decisions and are accountable for results and adhering to budget.

20) Transparency. Accountability and Corruption in the Public Sector. In countries with high scores, the reasons for decisions, and their results and costs, are clear and communicated to the general public. Accountability for decisions is ensured through audits, inspections, etc. Conflict of interest regulations for public servants are enforced. Authorities monitor the prevalence of corruption and implement sanctions in a transparent manner.

Notes:

[1] IDA also considers a country’s population and level of poverty. For two countries with the same population and CPIA score, aid relative to income should be higher for the poorer country. Also, African countries receive a priority allocation if their performance warrants it. Finally, for borrowers that are eligible for both IDA and IBRD funds ("Blend countries"), allocations take into account those countries' creditworthiness and access to other sources of funds as well as their ability to use IDA resources for poverty reduction.
[2] IDA, “Allocating IDA Funds Based on Performance,” March 2003, p. 1.
[3] The World Bank Group’s Board of Executive Directors adopted the PSD Strategy as their new corporate blueprint on February 26, 2002. Among other things, the PSD Strategy provides businesses with a greater incentive to invest in low-income countries. For instance, the World Bank Group is designing and launching new loan, grant, and guarantee products that, among other things, a) subsidize corporate costs of making utility network to poor households and reducing the consumption costs of these households; b) extend a higher volume of loans and guarantees to local-level governments, particularly for implementing private provision, and c) compensate corporations for losses arising from devaluations in local currency.
[4] There are many examples of this double standard. For instance, for a long time, the Bank disclosed the CASs for low-income countries, while more prosperous countries were given discretion.
[5] The methodology involves finding a weighted average of the CPIA score (which counts for 80% of the rating) and the portfolio performance score (which countries for 20%) and multiplying it by the “governance factor” to produce the country’s IDA Performance Rating.
[6] IDA, “IDA’s Performance-Based Allocation System: Current and Emerging Issues,” October 2003, p. 2.
[7] The IMF and World Bank require that government adopt procedures for establishing “transparency in procurement,” when in Cancun 169 developing countries opposed opening trade negotiations on that issue. Moreover, the Bank has proposed binding loan conditions that require borrowers to adopt laws calling for “national treatment” in government procurement. This means that governments would need to treat foreign providers (e.g., water, health care, education providers) the same as domestic providers in every regard, including equivalent subsidies. (See Ghana’s July 2003 Poverty Reduction Support Credit.)
[8] Such interference is routine, but not usually recognized as such For instance, the Bank’s “Strategic Communications Toolkit on Privatization” (2002) instructs Bank staff about how to engineer majorities in the parliaments of borrowing countries to approve Bank-supported privatization legislation.
[9] The World Bank is designing a new performance rating scale for LICUS countries that is intended to more clearly differentiate among them.
[10] These possible winners were identified by Steve Radelet in his paper, “Qualifying for the Millennium Challenge Account,” Center for Global Development, December 12, 2002, Table 3. Radelet is a former official of the U.S. Treasury Department.
[11] As quoted in, Vasquez, Ian, “The New Approach to Foreign Aid: Is the Enthusiasm Warranted,” Cato Foreign Policy Briefing Paper No. 79, September 17, 2003.
[12] As quoted in Herman, Barry, “How Should Measurements of an Enabling Environment for Development Be Used?” Discussion paper for 18th Technical Group Meeting of the Group of 24, Geneva, March 8-9, 2004.
[13] Each donor and creditor prepares a strategy for assisting each recipient country. Hence, there may be dozens of strategies (in addition to the CAS) prepared for a single developing country.
[14] World Bank, “Country Assistance Strategies: Retrospective and Future Directions,” March 14, 2003, p. 49.
[15] The PRSP displaces domestic policy planning. Senegal tried this when it developed its “10th Economic and Social Development Plan for 2002-2007.” Seeing this plan as a potential threat to Senegal’s PRSP, the IMF and World Bank concluded that the PRSP should supplant this homegrown plan, which they deemed "a thing of the past."
[16] Other factors that undermine sovereignty include: the exclusion of citizens’ groups from formulation of macroeconomic and structural policy; the peripheral role played by parliamentarians; and the role arrogated by the IFIs of endorsing each government’s development strategy. In addition, the IMF sets the macroeconomic framework for the PRSP.
[17] Importantly, Weisbrot and Baker find that growth rates in every region were higher in the period 1960-1980 before the introduction of structural adjustment than in the period 1980-1997. Easterly finds an inverse correlation between the number of adjustment loans made per year and developing country growth rates. See also findings by Lawrence King above.
[18] Some countries have not been rated and do not appear in any of the tables below, e.g., Afghanistan, Liberia, Myanmar, Somalia, Timor-Leste. An entry of "N/R" indicates that the country was not rated in that category.
[19] Recent changes in the allocation system can be reviewed at: http://www.worldbank.org/ida