World Bank Post-Conflict Aid: Oversight Issues for Congress

World Bank Post-Conflict Aid: Oversight Issues for Congress

Order Code RS21819
April 19, 2004
CRS Report for Congress
Received through the CRS Web
World Bank Post-Conflict Aid:
Oversight Issues for Congress
Martin A. Weiss
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade
Summary
The World Bank has taken an increasingly active role in providing post-conflict
aid. This assistance provides both short-term humanitarian relief and long-term
economic support for countries emerging from conflict. Although this aid is sanctioned
by the World Bank’s mandate, it raises questions that may be appropriate for
congressional oversight. These include how extensive is the World Bank’s
understanding of post-conflict aid’s effects on recipient countries and how well World
Bank aid is coordinated with other donors. This report will be updated as needed.
Introduction and Background
Post-conflict societies are a major U.S. foreign policy concern. The post-conflict
environment often perpetuates economic strife and poverty, such as in Cambodia, and can
lead to regional instability, such as conflict in many central African countries that has
been ongoing since the 1990s. Post-conflict societies may also provide potential haven
to terrorist groups, such as the Taliban’s sheltering of Al Qaeda in Afghanistan.
In order to help improve the quality and quantity of post-conflict assistance, the U.S.
government has actively supported World Bank involvement in post-conflict aid, a
growing component of World Bank activity. In 1998, a World Bank study showed that
the volume of World Bank lending to post-conflict countries has increased by 800% since
1980, and that 16% of the World Bank’s 1998 lending was to post-conflict countries.1
More recent estimates set the amount of post-conflict assistance at between 20% and 25%
of total current lending (In 2003, the World Bank lent $18.5 billion).
The increase in World Bank lending to post-conflict countries can most easily be
attributed to an increase in conflicts during the 1990s. The end of the Cold War and the
collapse of the Soviet Union has manifested itself in numerous conflicts, especially in
1 The World Bank’s Experience with Post-Conflict Reconstruction, Operations Evaluation
Department, World Bank, 1998.
Congressional Research Service ˜ The Library of Congress

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Africa, and poor and developing countries who were recipients of large aid flows from
the Soviet Union. During the 1990s, civilian war-related deaths accounted for 90% of all
war-related deaths and violence created approximately 13 million refugees and 38 million
internally displaced persons world-wide.2
Congress intermittently appropriates funds to the World Bank to fund its aid
programs.3 In July 2002, World Bank donor countries agreed on the thirteenth
replenishment of the International Development Authority (IDA), the concessional
lending facility of the World Bank.4 The new replenishment, dubbed IDA-13, authorized
$22.8 billion in new aid for 2003-2005. The United States committed $2.55 billion to
IDA-13 ($850 million for each year, FY2003-FY2005), in addition to $300 million
pledged in incentive contributions if the World Bank meets certain performance targets.
For FY2005, the President is requesting $1.05 billion for the third of three scheduled
payments under IDA-13 ($850 million base payment and $200 million of the $300 million
incentive pledge). In addition, the President is requesting $11.3 million to pay a portion
of U.S. arrears to IDA. In FY2006, the President may also request Congress to authorize
and appropriate funds for IDA-14, currently under negotiation.
Defining Post-Conflict Aid
Post-conflict reconstruction aid is a unique form of development assistance with two
goals: (1) addressing short-term challenges which may include humanitarian assistance,
and other forms of relief and post-emergency assistance; and (2) repairing (and in some
cases creating) the infrastructure - both physical and institutional - necessary to support
long-term economic development. While these goals of relief and development are not
inherently incompatible, effectively distributing resources that balance these short and
long-term goals is potentially the most difficult challenge for post-conflict aid.
World Bank Post-Conflict Aid
At the World Bank, nine countries are currently eligible for post-conflict assistance:
Afghanistan, Angola, Burundi, Congo Republic, Democratic Republic of Congo, Ivory
Coast, Eritrea, Sierra Leone, and East Timor. Operations in non-sovereign regions, such
as the West Bank and Gaza or Iraq are funded out of World Bank net-income or through
multi-donor trust funds. The regional development banks, such as the African
Development Bank (AfDB) and the Asian Development Bank (AsDB), as well as the
International Monetary Fund (IMF), are active in post-conflict assistance, and often
coordinate and partner with the World Bank to provide post-conflict assistance.
World Bank Policy. In 2001, the World Bank officially defined the terms of its
post-conflict activity. Operational Policy 2.30 “Development Cooperation and Conflict”
established a three-stage procedure for World Bank conflict-related assistance. This
2 The Economics of Civil Wars, Crime, and Violence, available online from the World Bank
website, [http://www.worldbank.org/research/conflict/motivation.htm].
3 See CRS Issue Brief IB96008, Multilateral Development Banks: Issues for the 108th Congress.
4 Since IDA makes below market-rate loans, in addition to grants, its capital base needs to be
replenished on a periodic basis.

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process is designed to help a country transition from conflict to the normal World Bank
relationship with borrower countries. The first stage is called a Watching Brief, and
involves monitoring the evolving socio-economic situation on the ground during a
conflict. This allows the World Bank to begin preparations for its involvement once
fighting ends. The second stage is the creation of a Needs Assessment, once the physical
safety of World Bank staff can be guaranteed. The Bank, usually along with the United
Nations (U.N.), will send in teams of analysts to research and prepare this report. This
document presents the Bank’s analysis of a country’s reconstruction needs and estimates
of their cost. It is normally prepared prior to an international donor conference, where
countries may pledge funds and draw up the framework for a multi-donor trust fund. The
Needs Assessment also plays a fundamental role in the third stage, the creation of a
Transitional Support Strategy (TSS), a short to medium-term assistance plan that often
acts as bridge between short-term recovery assistance and long-term development
objectives. Once a recipient country successfully emerges from conflict and is eligible
for lending, a Country Assistance Strategy (CAS) will be prepared by the World Bank.
The CAS is the primary lending framework for World Bank assistance. Usually prepared
every three years, the CAS identifies key areas where World Bank assistance would be
most effective, and proposes lending projects to accomplish these goals.
World Bank Grants. The World Bank is increasingly providing aid in the form
of grants, rather than loans. Grants accounted for 17% of all IDA assistance in 2003.
Under the IDA-13 agreement, post-conflict countries are eligible to receive up to 40% of
their IDA allocation in grants. Negotiations for IDA-14 began in February 2004, and the
Administration has stated it will seek to increase the percentage of IDA resources
allocated as grants.5 Grant usage for 2004 is planned to be about 22%.6 IDA also sets
aside $500 million per year for temporary increases for post-conflict country allocations.
The World Bank has created a separate entity, the Post-Conflict Fund (PCF) to
provide grants for physical and social reconstruction. In 2003, the PCF allocated $11.8
million through sixteen newly approved grants, and disbursed $13 million across its total
portfolio. Since the PCF was established in 1997, $61.5 million has been approved for
120 separate grants, and $46.9 million has been disbursed.7 World Bank Watching Briefs
and Needs Assessments are often funded by the PCF.
World Bank Trust Funds. Aid recipients often are not a member of the World
Bank. It might owe arrears to the Bank, or there might be no effective government for
the World Bank to deal with. In these cases, trust funds, either administered solely by the
World Bank, or by the World Bank in conjunction with other international institutions
have coordinated and disbursed post-conflict aid.
There is a rationale for bilateral donors to provide post-conflict aid through
multilateral donors such as the World Bank. Since the World Bank’s charter abhors any
5 John B. Taylor, Under Secretary of The Treasury, “Remarks on the Millennium Challenge
Corporation Selection Criteria,” Mar. 10, 2004.
6 Treasury International Programs: Justification for Appropriations, FY2005 Budget Request.
The Department of the Treasury,
7 Post-Conflict Fund Annual Report 2003, World Bank.

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political involvement, many agree that it is a more proficient (as well as more credible)
provider of information about post-conflict countries. A study has also shown that
bilateral foreign aid is often heavily determined by donor foreign policy interests, rather
the economic needs of the recipient country.8 Moreover, since the World Bank has some
degree of autonomy from its donor members, it may be easier for the Bank to secure
policy reforms in recipient countries than by individual donors. It is also argued that
governments provide aid multilaterally when their publics are more skeptical about the
benefits of providing the foreign aid. Sending foreign assistance through an institution
such as the World Bank can also help a donor government reassure its citizens that its
foreign aid (funded by tax revenue) is being spent appropriately.9
Some analysts contend that the United States loses too much control over the
provision of its aid with a multilateral approach. First, they argue, it is very difficult for
donors to earmark funds when they are contributed multilaterally. If other donors are not
in broad support of the U.S. aid agenda, the United States might be able to achieve its
foreign policy objectives more directly by providing bilateral aid through the U.S. Agency
for International Development or some other U.S. agency. Second, since the United
States does not have a veto power on World Bank lending, the Bank sometimes provides
assistance to countries, despite strong U.S. opposition. For example, the World Bank
approved $180 million in earthquake recovery in 2003 for Iran, a State Department-
determined supporter of international terrorism. A purely bilateral approach might ensure
that no U.S. funds are used to support aid programs that run counter to U.S. foreign
policy.
Oversight Issues for Congress
Although aid is highly context specific, some general questions may be raised as
Congress exercises its oversight role and considers appropriations for the World Bank and
other international financial institutions involved in post-conflict assistance. Most
importantly, post-conflict operations are a major component of the current IDA-14
negotiations. These negotiations are expected to be concluded by the end of 2004, with
the President seeking appropriations and authorization during the upcoming 109th
Congress.
How Extensive Is World Bank Research into How Aid Impacts Post-
conflict Countries? Some argue that the World Bank often rushes in to provide
assistance during post-conflict transitions without a full understanding of the implications
of how post-conflict aid affects the recipient country. Critics have noted that on some
occasions, World Bank interventions could serve to recreate the political or economic
conditions that led to conflict in the first place.10 Increased conflict analysis and research
8 Alesina, Alberto and Dollar, David, “Who Gives Foreign Aid to Whom and Why?” NBER
Working Paper No. w6612, June 1998.
9 Milner, Helner, Why Multilateralism? Foreign Aid and Domestic Principal-Agent Problems,
Feb. 12, 2004, mimeo.
10 “World Bank, IMF and Armed Conflicts: Helping Peace or Creating the Conditions for War?,”
Bretton Woods Project, Feb. 2004.

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into the roots of civil violence could help to ensure that civil violence is not systemically
repeated.
Does the Post-Conflict Country Have the Institutional Infrastructure to
Effectively Utilize Donor Assistance? Studies have found that although post-
conflict countries’ absorptive capacity is low during roughly the first three years after the
end of violence, it tends to double by the end of the first decade.11 This research suggests
that it may be best not to create an “aid surge” in the immediate years after the cessation
of violence, but rather phase in assistance over the first decade. However, post-conflict
countries often receive the highest levels of foreign aid early on, and such assistance often
tapers off over the ensuing years.
What Is the Appropriate Sequencing of Reforms? Although there is often
low initial aid absorptive capacity, early policy decisions can greatly affect long-term
economic growth potential. One World Bank study found that social policies, such as
monitoring poverty and establishing safety nets for marginalized members of society, are
very important in the immediate post-conflict environment, but that such policy choices
have been insufficiently incorporated into the design of post-conflict aid. Evidence shows
that donors often make monetary and fiscal policy, and debt management their first
priority once they commit post-conflict aid.12
Is There a Clear and Well-Defined Objective Before Aid Is Given?
Although each recipient has both short and long-term assistance needs, an aid program
can only be successful if these needs are clearly defined. The Bank has been very
successful in conducting needs assessment reports that have served as guides for post-
conflict assistance. Since many other actors are involved in the post-conflict environment
(such as the U.S. Agency for International Development, U.N. Development Program,
various international non-governmental organizations) a clear, well-coordinated objective
is imperative for a successful transition out of conflict.
How Does the World Bank Ensure That Short-term Policies Enacted Do
Not Compromise Long-Term Objectives? Expansionary economic policies such
as price controls or rapid expansion of government employees, may create a needed
short-term economic stimulus, but they can complicate a country’s long-term economic
viability. For example, immediately following the introduction of aid flows to the West
Bank and Gaza, public expenditures dramatically increased along with a proliferation of
government ministries.13 Once aid levels come down, it is much harder to restrain fiscal
spending. Consistency among short and long-term economic policy plans is essential.
Is There a Clear and Well Defined Exit Strategy? A major objective of any
post-conflict assistance must be the encouragement of local capacity-building to make
governing decisions and ensure that local populations are active participants in the
11 Collier, Paul and Hoeffler, Anke “Aid, Policy and Growth in Post-Conflict Societies,” World
Bank Working Paper, Oct. 2002.
12 Ibid.
13 Schiavo-Campo, S., “Financing And Aid Arrangements In Post-Conflict Situations,” World
Bank Working Paper, May 2003, p 10.

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reconstruction process. Domestic institutions must be built that can eventually take over
the reconstruction process. A recent study has shown that in some cases, countries can
become recurrent users of international financial assistance. These countries often lack
the incentive and ability to make necessary reforms.14
Is the World Bank’s Role Appropriately Coordinated with the United
Nations and Other Donors? Since the World Bank’s mandate forbids its
involvement in security and military related activities, the U.N. plays a vital and important
role in establishing physical security, and often takes responsibility for many political
matters outside of the World Bank’s mandate. In some cases, such as East Timor, the
U.N. has served as the de facto government of the post-conflict region. In addition to
providing security or its governance function, the U.N. also has an external development
role in helping the World Bank coordinate donor assistance. Functional conflicts of
interest could occur if the U.N. is helping coordinate the distribution of aid and at the
same time is serving as de facto government and is a recipient of aid flows.
How Extensive Is the Monitoring and Evaluation of Post-Conflict Aid?
A major objective of the U.S. government and other donors is to reinforce the World
Bank’s efforts to increase the use of measurable results and performance based allocation
in the World Bank’s lending. International attention often fades as one international
crises segues into the next. Because post-conflict assistance is often most valuable years
after the end of violence, further monitoring and evaluation of post-conflict aid efforts
may be prudent to ensure that the Bank is administering such aid effectively and adhering
to U.S. policy objectives. This would also be in line with the Administration’s results
measurements objectives.
Additional Issues. Active World Bank post-conflict activity raises many other
questions, including how do donor countries foreign policy objectives interact or interface
with the World Bank’s mandate to avoid political activity? What are the lessons learned
from earlier interventions and how successful have the interventions been? Is the World
Bank the best international actor to coordinate development assistance? Has previous
donor coordination been successful, or has there been overlap between national agencies’
activities and the other development banks? Should post-conflict aid be provided in the
form of grants or loans? Definitive answers are not available for many of these questions,
but a greater understanding of post-conflict aid and its impacts would likely increase its
effectiveness.
14 Independent Evaluation Office of the International Monetary Fund, Evaluation of the
Prolonged Use of Fund Resources, Sept. 25, 2002.