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p. 7 of 10 BACK | NEXT Executive Summary I. The Context II. Present Bank Policies and Practices III. Graduation Policies of Other Multilateral Development Banks IV. Rationalizing the Bank's Classification and Graduation System A. Graduation From ADF B. Graduation From Bank Assistance V. Other Operational Implications VI.Conclusions VII. Recommendation

A Graduation Policy for the Bank's DMC's : IV. Rationalizing the Bank's Classification and Graduation System

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B. Graduation from Bank Assistance

64. Part A of this section dealt with the graduation of DMCs from ADF-only through ADF with limited OCR to OCR with limited ADF, to OCR-only. Part B discusses the graduation process further downstream, i.e., from OCR-only to graduation out of regular Bank assistance.
65. As in the case of the Bank's concessional lending operations, the classification system needs to reflect the progress DMCs have made in reducing their dependence on non-concessional official assistance. Besides, one of the major recommendations of the Report of the Task Force on Multilateral Development Banks³⁸ is that, in countries having reliable access to private capital, MDBs should initiate the process of financial disengagement and establish graduation policies for this purpose.
66. The present system does not formally follow the transition process to its logical conclusion, i.e., to graduation from regular Bank assistance. In the absence of a formal policy on graduation out of Bank assistance, the arrangements for cooperation among graduated DMCs, the Bank, and borrowing DMCs are ad hoc. To address these concerns, policies should be formulated that
1. extend the graduation policy to graduation from regular Bank assistance;
2. specify the process by which DMCs will be graduated from regular Bank assistance; and
3. provide a framework for the relationship among graduated DMCs, borrowing DMCs, and the Bank.

The first step is to develop the criteria for graduation from Bank assistance.

1. The Criteria

67. The criteria for graduation from regular Bank assistance will be
1. per capita GNP;
2. availability of commercial capital flows on reasonable terms; and
3. for key economic and social institutions, attainment of a certain level of development.

a. Per Capita GNP

68. A per capita GNP benchmark is needed to trigger graduation procedures. For this purpose, the IBRD benchmark of $5,445 (at 1997 prices) is adopted.

b. Creditworthiness

69. Access to international capital markets for medium- and long-term capital is a key criterion for graduation from regular Bank assistance. Particular attention will be paid to the adequacy and sustainability of private capital flows. Determining the sustainability of private capital flows is not easy because the prospects for sustainability vary widely by country, and considerably by type of capital flow. A proper assessment of the sustainability of capital flows requires a country-specific evaluation of whether the prevailing policy, incentive structures, and institutions encourage the use of capital to support investment and whether the growth of exports will provide the basis for sustained creditworthiness. Key considerations in this regard include macroeconomic stability, exchange rate policy, the extent of trade and investment liberalization, privatization, tax reform, financial sector liberalization, and corporate governance. Both the record of past access and future prospects will be taken into account in assessing a DMC’s readiness for complete reliance on commercial capital flows.

c. Economic and Social Institutions

70. Institutional capacity building is one of the Bank's strategic operating objectives. In determining a country's readiness for graduation, the degree to which economic and social institutions have taken hold, and their capacity for fostering sound development management will be taken into account. Development management is contingent upon context and opportunity. As such, assessment of the level of institutional development would necessarily be country-specific. Broadly speaking, the following considerations will, inter alia, be taken into account in assessing the level of development of key economic and social institutions: (i) the quality of processes for macroeconomic management, (ii) the regulatory and supervisory framework in the financial sector, (iii) the efficiency and flexibility of labor markets, and (iv) the legal system.
71. Once a country crosses the per capita GNP threshold for graduation from regular Bank assistance, its readiness for graduation would be reviewed annually. Graduation from regular Bank lending would be expected to occur within four years of meeting all three graduation criteria, i.e., per capita GNP, creditworthiness, and advanced level of development of economic and social institutions. At that time, Board approval may be obtained on a “no-objection” basis. The Bank may also decide to cease or reduce regular lending to a country whose per capita GNP remains below the level of the graduation trigger, provided its creditworthiness and performance warrant such an action.
72. In planning the graduation process for a country, the Bank would seek an understanding with that country about the length of the phase-out period, the number and type of projects to be included, and the total amount of lending. Sectors that have been receiving commercial financing, both external and domestic, on a sustained basis can be graduated from OCR lending ahead of other sectors (para. 7). The volume of lending will taper off gradually. A logical sequencing would be to first phase out direct lending, to be followed by TA and direct private sector involvement.
73. Graduation from private sector operations requires further elaboration. Under the World Bank system, IBRD graduates continue to be eligible for IFC operations for a number of years. However, unlike the World Bank, the Bank’s private sector operations are located within the institution and the source of funding for private sector borrowing is OCR. Private enterprises in the graduated DMCs are expected to be able to tap into domestic financial systems that are well developed, supplemented by resort to international capital markets. To the extent that the Bank’s resources are invested in these countries, the availability of funds for less developed, regular borrowers of the Bank would be diminished. For these reasons, continuation of direct private sector involvement in graduated DMCs would not be justified.
74. While graduation will not involve a change in the development status of the concerned country, it will formally differentiate high-income nonborrowing DMCs from other DMCs. Graduation from regular Bank assistance need not and should not be linked with the development status of a country, which is typically determined at the time of its admission as a member of the Bank and can be reviewed by the Board of Governors. Graduation from regular Bank assistance means that the country concerned has reached a stage where it can carry forward the development process without regular Bank assistance.

2. Application of Criteria

Some Bank members already meet the graduation criteria set forth above:

1. Singapore, which has a per capita GNP of $26,470 at 1997 prices, ceased to borrow from the Bank in 1980;
2. Hong Kong, China, which has a per capita GDP³⁹ of $26,360 received its last Bank loan in 1980;
3. Taipei,China, which has a per capita GNP of $13,200 has not borrowed from the Bank since 1971; and
4. The Republic of Korea which has a per capita GNP of $10,550, received its last regular public sector project loan in 1988. However, the Republic of Korea is currently receiving emergency assistance from the Bank.

76. The per capita GNP levels of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China are well above the trigger of $5,445. Starting with the May 1997 World Economic Outlook, the IMF began classifying these four as "advanced economies" along with the group of countries traditionally known as industrial countries. IMF justified its reclassification on the grounds that the four economies have well-developed financial markets and high degrees of financial intermediation, as well as diversified economic structures with relatively large and rapidly growing service sectors.⁴⁰ The Republic of Korea was admitted to the Organisation for Economic Co-operation and Development (OECD) in 1996.

77. The four economies (Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China) meet the identified criteria and may be graduated from Bank assistance immediately. They have access to international capital markets for medium- and long-term capital. Economic and social institutions are well developed in these economies, and human development indicators are exceptionally good. The Human Development Report 1998 lists Hong Kong, China (ranked 25), the Republic of Korea (ranked 30), and Singapore (ranked 28) among the economies⁴¹ that have achieved a high level of human development.

3. Postgraduation Relationship

78. Graduation from Bank assistance would not signify termination of a DMC's relationship. Rather, it is seen as the transition to a new phase in that relationship. Some of the ways in which graduated DMCs and the Bank will cooperate in this phase are indicated below.

a. Emergency Assistance

79. The recent crises overtaking several East and Southeast Asian economies show that even relatively more advanced DMCs are not immune to temporary economic reversals. Such crises are symptoms of the globalization of economic and financial activities, where domestic and/or external events can have rapid impact on confidence of markets in members’ economies and on their creditworthiness. It is therefore proposed that emergency assistance should be available to DMCs that have graduated from regular Bank assistance.

b. Provision of Expert Services and Technical Assistance

80. Staff resources permitting, the Bank could provide expert services and TA on a reimbursable basis to graduated DMCs, should they so desire. These services could be provided for

1. reviews of sector plans and policies,
2. institution building, and
3. training of staff from graduated DMCs. However, active borrowers would always have priority on staff resources.

c. Bond Issues

d. Transfer of Technology

82. The transfer of technology between graduated DMCs and other DMCs could be expanded in fields where the former have established a comparative advantage. Such cooperation could be undertaken on a case-by-case basis or under formal arrangements with one or more of the graduated DMCs.

e. Cofinancing

83. Graduated DMCs and the Bank could enter into cofinancing arrangements for projects in borrowing DMCs. The Bank could provide its expertise in project appraisal and administration services for a fee as it does for certain developed member countries.

f. Promotion of Private-to-Private Flows

84. The Bank would seek the participation of private enterprises and financial intermediaries from the high-income graduated DMCs in private enterprises of the low- and middle-income DMCs. In this way, it would be promoting private-to-private flows among DMCs within the region.

g. Subregional Cooperation

85. The Bank has several initiatives in subregional cooperation, notably in the Greater Mekong Subregion. The involvement of graduated DMCs in such initiatives could impart greater momentum to activities in subregional cooperation. Such involvement could take forms such as provision of counterguarantees for subregional projects funded out of OCR, cofinancing, etc.

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