As a result of rapid development in the region, ADB deals with a significantly more diverse set of countries today than it did a few decades ago. ADB’s support therefore needs to be highly customized to the development needs of each group of countries. In parallel to the overall institutional strategy laid out in the second medium-term strategy, ADB worked on distinct approaches to deal with these different groups of countries.
Weakly Performing Countries
Many of the region’s poor people live in developing member countries with weak governance, ineffective public administration, and civil unrest. In many of these countries, large-scale and violent civil conflict has impaired the government’s ability to guarantee people’s security. In such a setting, achieving the Millennium Development Goals is difficult.
The second medium-term strategy calls for a special approach to dealing with weakly performing countries and warns of the dangers of a lack of, or limited, engagement with them. ADB’s current approach is based on its strategic framework and its performance-based allocation system, which tends to channel more funds to countries that perform well based on set criteria, including good governance. However, this could mean that the countries needing the most assistance in improving governance and reducing poverty may get less help because of their poor performance.
Effective assistance programs in weakly performing countries must be based on country ownership and bolstered by systematic capacity development. ADB plans to respond to the need for capacity building by mobilizing greater technical assistance and other grant financing from its partners. ADB operations in weakly performing countries will involve partnerships at all stages and will require ADB to pursue cofinancing opportunities. ADB continues to refine its approach to identifying and defining weak performance, rethink its operational planning, and adapt its business processes and instruments to ensure that its engagement is suitable and effective for individual weakly performing countries and is consistent with the Paris Declaration.
A background paper on the subject was prepared and discussed during the ADF IX midterm review exercise in Frankfurt, Germany, in December 2006. A Board paper on ADB’s Approach to Engaging with Weakly Performing Countries: Achieving Development Effectiveness in Weakly Performing Countries is expected to be submitted to the Board of Directors in 2007.
ADB will undertake more focused governance activities and renew its commitment to fighting corruption
Poor people typically bear the greatest burden of pollution and environmental degradation
ADF RECIPIENT Countries, the ADF IX Midterm Review
On 4–5 December 2006 in Frankfurt, ADF deputies from donor countries, representatives from ADF borrowing members, and observers from other international development institutions met with ADB Management and staff to review the progress of ADF IX implementation (2005–2008). Two vice presidents for operations headed the ADB team. The discussion emphasized the need for ADB to continue its focus on poverty reduction, with greater effort to demonstrate a link between ADF operations and poverty reduction.
In this context, a midterm report prepared by ADB’s Operations Evaluation Department was submitted to ADF donors. To provide some indication of the results achieved by ADF-funded public sector projects, their success rates were compared with those of OCR-funded projects over time. The analyses found that 70% of OCR projects were rated successful compared with 58% of ADF-funded projects, although both OCR and ADF ratings converged and improved markedly in recent years. This result should not be surprising as ADF is allocated to poorer countries, which often face daunting development challenges mainly because of country-specific initial conditions and weaker institutional capabilities.
Overall, ADF participants supported aligning the ADF grant framework with that of the International Development Association 14 in 2007, and requested further review and analysis of the financial implications of the change to be made before ADF X negotiations. Participants also suggested that ADB participate in preparing a joint debt sustainability assessment with the International Monetary Fund and the World Bank, and prepare a separate assessment only in countries where these institutions are not preparing one. ADB will prepare a Board paper on the proposed changes to the ADF grant framework that will reflect the comments.
Participants voiced strong support for the revised performance-based allocation policy and especially welcomed the increased rigor and transparency in the system. Participants appreciated the issues raised by ADB regarding the new system’s outcomes such as the shift of resources away from countries eligible only for ADF funding, the volatility of allocations, and the challenge of ensuring cross-country comparability of assessments conducted by different country teams. Participants requested further analysis of the issues raised and urged ADB to continue the close coordination with the International Development Association and the African Development Fund to address performance-based allocation implementation issues. ADB will present its analysis and recommendations on such issues to the donors during ADF X negotiations.
Donors agreed that ADB should participate in debt relief of heavily indebted poor countries if any ADF recipient country becomes eligible, while reaffirming the need to maintain the financial viability of the ADF and not to impair support for ADF recipient countries. Donors noted their willingness to discuss additional funding for financing debt relief to heavily indebted poor countries—consistent with the treatment of debt relief by other multilateral development banks—during the ADF X negotiations. They stressed that ADB should maximize the use of its internal resources but that any financing should not undermine the financial integrity of ADB. The vice presidents noted that, in light of donors’ willingness to cover some of the cost of debt relief, ADB was willing to discuss burden sharing to cover those costs. Management will consider these issues, and a Board paper further analyzing the financial implications of debt relief under various scenarios will be prepared.
ADB noted that ADF IX resource mobilization has been smooth so far because of timely donor contributions. Participants endorsed the proposal to use the special drawing rights composite discount rate to calculate credits for new donor participants in the accelerated note encashment program. They endorsed the proposal to reduce Nauru’s contribution to ADF. Participants supported an ADF liquidity management policy and investment guidelines, which ADB will prepare by the end of 2007.
Participants agreed to hold an informal meeting on the sidelines of the ADB Annual Meeting in May 2007 to plan for ADF X negotiations. In particular, participants indicated that they hoped to see more progress in the implementation of the ADB human resources strategy and clearer reporting on ADF outcomes during ADF X negotiations. While noting some progress by ADB, they felt much more needed to be accomplished. Some participants raised concerns on the centralized administration of human resources and budget, emphasizing insufficient control and flexibility over these functions by the vice presidents and decisions that are not seen as transparent. Many participants called for the next staff engagement survey to be brought forward and suggested an independent progress review of the human resources strategy. Participants welcomed the changes in staff evaluation embodied in the performance and development plans. They urged greater effort to institute a merit-based system of staff selection and promotion at all levels. Participants pressed for greater efforts to achieve gender balance in ADB also at the senior levels. ADB acknowledged the importance of these issues and agreed to consider ways to address them.
ADF IX resource mobilization has been smooth so far because of timely donor contributions
Pathways Out of Poverty
A study completed in 2006 challenges some key assumptions underlying ADB’s poverty targeting in rural areas. Given that poverty reduction is ADB’s overarching goal and that most of the poor still live in rural areas, the study has far-reaching implications for future projects.
A key recommendation of Pathways Out of Rural Poverty and the Effectiveness of Poverty Targeting is to tailor projects to address the specific causes of poverty in a particular area instead of providing a standard package of rural infrastructure and agricultural development.
The study argues against a too-narrow focus on poor households in poor areas as this can isolate the poor from the more dynamic actors in society and from the mainstream of economic growth. Supporting economic activity led by the nonpoor could create jobs for the poor and lift them out of poverty.
The study—conducted in the People’s Republic of China, Malaysia, and Viet Nam—found that most of those who had risen out of poverty had done so by migrating to areas with more dynamic growth.
Poverty targeting has been widely used in development projects to channel funds to poor regions or deliver benefits to poor households and, in particular, to upgrade rural infrastructure or support agricultural production. The study challenges the assumptions that this approach is based on—that poor people live in poor regions, that public investment in poor regions automatically reduces poverty, and that the solution to poverty in a poor region lies within that region.
The study found that the bulk of the rural poor live in less-poor regions, the location of projects in poor regions does not guarantee significant poverty reduction, and solutions to persistent rural poverty in remote and poorly endowed regions often lie in economic growth outside those regions.
Supporting economic activity led by the nonpoor could create jobs for the poor and lift them out of poverty
Middle-Income Countries and OCR Borrowers
Providing effective assistance to middle-income countries and borrowers from OCR is essential if ADB is to achieve its vision of an Asia and Pacific region free from poverty. OCR-borrowing countries are home to two thirds of the world’s poor living below $1 dollar a day and account for the bulk of ADB lending operations. In recent years up to 2004, the OCR public sector portfolio had experienced little change in the annual numbers of new loans approved, increased concentration in a limited number of countries and sectors, stable disbursements, and high cancellation rates. In 2006, disbursements and new approvals increased significantly.
To address these concerns, in June 2004, ADB began exploring how it could enhance its support to OCR borrowers. The work focused on three mutually reinforcing objectives: review the main development challenges facing this diverse group of countries, articulate the countries’ demands and expectations of ADB’s role in helping them meet these challenges, and discuss how ADB can improve its services to OCR borrowers.
On 7 April 2006, ADB and the World Bank jointly organized a consultation meeting with senior officials from various Asian middle-income countries at ADB headquarters. The main objective of the consultation meeting was to assess whether the current set of reforms under adoption and implementation was sufficient to meet the development needs of middle-income countries. The event promoted an active exchange of views and valuable feedback.
The work culminated in the preparation of a paper, Enhancing ADB Support to Middle-Income Countries and OCR Borrowers, outlining a coherent framework for ongoing and planned initiatives in this area. The paper, which the ADB Board of Directors discussed in August 2006, would serve as a basis to monitor progress over time. The initiatives were grouped into three main areas: reducing the costs of doing business with ADB, expanding and enhancing ADB’s operational instruments, and enhancing the quality of ADB’s services. Many of these initiatives were developed as part of the innovation and efficiency initiative.
Providing effective assistance to middle-income countries and borrowers from OCR is essential if ADB is to achieve its vision of an Asia and Pacific region free from poverty
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