The World Bank’s International Development Association (IDA) was created more than 50 years ago to provide low-cost financing to the world’s poorest countries. Economic growth is lifting many of these countries into middle-income status. What happens when most of IDA’s borrowing countries are no longer classified as poor?
My guest on this week’s Wonckast, senior fellow Todd Moss, offers answers from a new CGD working group report he helped to write: Soft Lending without Poor Countries: Recommendations for a New IDA.
“When IDA was created, it was the most important creditor for these poor countries,” explains Todd. “IDA offers 40 year loans at less than 1 percent interest. It’s able to do this because the World Bank’s shareholders come together every three years and chip in money.”
Todd and his fellow working group co-chair, Jean-Michel Severino, argue this model no longer makes sense as a growing number of IDA clients attain middle-income status.
In IDA’s early days, about 90 percent of the world’s poorest people lived in poor countries—those with average annual incomes below the IDA ceiling, currently about $1,175 per person. Today roughly three-out-of-four poor people live in middle income countries, places like China, India, Nigeria and Pakistan, which have already graduated or will soon graduate from IDA, explains Todd.
Meanwhile, traditional donors—countries like the US, Japan, and big European aid providers—are struggling to rein in fiscal deficits and some of the former IDA recipients are setting up aid programs of their own. Looking just a few years down the road, this will create a “perfect storm” for IDA of reduced demand and reduced supply, Todd says.
“The time to begin addressing this problem is now,” Todd adds. “The shareholders get together and agree on how much are they going to give to IDA and what are they are going to ask IDA to do differently in managing that money,” he explains.
“We’re now in the IDA-16 replenishment period, so we've done this 16 times. The shareholders will be meeting in Tokyo in a couple days’ time and they will start to think about what they'll do for IDA-17.”
While the shareholders will soon focus on reviewing IDA-16 and replenishing IDA-17, Todd tells me, they should also be looking towards IDA-19 and 20, when projections suggest that reductions in IDA financing supply and demand will become too obvious to ignore.
“Every World Bank president wants to have a bigger IDA replenishment than the last,” Todd explains. “But the fundamental challenge for Jim Kim is adapting IDA’s business model to a new world rather than just raising money.”
Among the options we discuss: raising the IDA ceiling or letting IDA shrink. Todd--and the working group he helped to lead—offer some alternatives they think are better. He says the three-year replenishment cycle and the custom of gathering and pledging money to help solve common problems as a “scarce resource” that could be put to better use.
“Maybe the IDA mechanism could be used to tackle a different kind of problem,” Todd suggests. “In the old world we had a lot of poor countries that needed financing, but that’s not the problem anymore. Now we have other problems that could be tackled, so IDA’s low-cost funds could be used to fund things like regional infrastructure, a renewable energy fund, or pharmaceutical technology -- things you could call global or regional public goods that could have a huge impact on the poor.”
As the IDA shareholders meet in Tokyo this week, Todd hopes they will take the working group’s recommendations into consideration. Several of the IDA deputies have expressed interest in the report’s recommendations, he says.
The future of IDA has been on the minds of the shareholders but they have been reluctant to raise it, Todd adds. “It sometimes helps when a third party puts some controversial ideas on the table,” says Todd. “So that’s partly our role, to just catalyze a discussion.”