A Framework For Strategic Choices Strategic Planning & Review Department December 29, 1988A FRAMEWORK FOR STRATEGIC CHOICES SOK FOR STRATEGIC CHOICES ‘Table of Conten's ‘THE GLOBAL ENVIRONMENT AND BANK STRATEGY ... ‘Gloval Growth Prospects and Structural Change Devotoping Country Challenges ‘The Bank's Role and Capacity OPTIONS FOR BANK GROWTH..... First Option: Accelerated Expansior ‘Second Option: Leveling off Third Option: Shared Growth... STRATEGIC DIRECTIONS ‘A. Mobilizing Financial Resources. B. Human Capital Formation and Institionat Development... ©. Envirenment Sustainability (OPERATIONAL IMPLICATIONS. Regional and Courtry Differences. Capital Requirements... ‘The Bank's Product Lina. Staff Implications... Ss Relations with the Privata Sector and Other Development Agencies... Areas of Special Emphasis and Bank Strategy. Organizational Strscture Other Implications . CRITICAL CHOICES. Lending Leve's and Resource Transfers Program Content wn. . Coneluding Remarks APPENDIX A Scenarios of the World Econamy APPENDIX B. Possile Growth Paths for IBRD Lencing APPENDIX G Debt Reduction Mechanisms APPENDIX 0 Project Preparation Costs ANNEX Strategic Agenda (October 74, 1988) 10 10 6 19 at a 31 32"1. THE GLOBAL ENVIRONMENT AND BANK STRATEGY 1. The World Bank approaches the 1990s facing an exceptionally dif ficult global environment for develop- ment. Most developing countries are struggling with the consequences of a disastrous decade in the 1980s, and will still be doing so for some years to come. World poverty is increasing, but prospects for greater resource flows to generate stronger growth in developing countries are bleak. The persistence of the debt crisis and the inability of the inter- national community to find a deci- sive solution are fundamental obstacles to development, particularly in Africa and Latin America, The industriel countries may face renewed inflation and recession, and are hav- ing difficulty coping ‘with profound structural changes in global economic power. 2. Yet this conld also be a de- cade of great opportunities, if the economic dynamism in some regions (eg. the Pacific Rim, a revitalized Europe) can be spread more widely, the technological revolution carried to poor as well as richer countries, and the enormous power of the emerging global economy and trading system effectively harnessed for de- velopment, ‘This is the breadth of the challenge facing the World Bank. ‘The Bank is the strongest and most experienced international instrunient of development, aud the only one which can claim truly global status. The strategic choices the Bank makes and the opportunities it grasps during the next decade will have a significant — in some circumstances perhaps decisive — influence on how well development is served by economic and political change in the 1990s. Globai_Growth Prospects and Struc tural Change 3. The likely future global envi- ronment has ‘been discussed in earlier papers in terms of five clusters of issues facing the Bank (see Strategic Agenda discussion draft, 14 October 1988, Annex 1). A ‘few of — these important developments are highlighted here. 4. ‘The. most likely prospect for the world economy is a continuation of rélatively low growth and present policy patterns through the mid- 1990s. This scenario (broadly_con- sistent with the projections of the Planning Assumptions Committee) foresees little substantial change in U.S. policy towards deficits, and continued willingness of Japan to finance these deficits; continued integration of European Community countries and increased trade within Europe somewhat at the expense of external trade; and, in a sluggish environment, only Jimited opportunities for import and export growth by misjor debtors and by other big economies — eg. India, China and the Soviet Union. World trade growth would be constrained to the 3-3.5 percent range, rouglily equal to world GDP growth, No massive shock would be anticipated in this scenario: occasional disruptions in exchange and financiai markets would occur, followed by marginal policy improvements to bring temporary stability to exchange and interest rates (see Appendix A). 5 A key aspect of this scenario is highly constrained global finance for development. Slow growth, the debt overhang and sonie financial market volatility would translate into restricted financial access for Bankborrowers, with flows concentrated among OBCD cconomies rather than between them and the developing world. These relatively poor financ- ing and trade prospects would leave debtor countries in severe difficulty and some in a state of crisis, ‘They would also accentuate the trend for relatively few countries to be full participants in the globe! financial and trading economy, and for a large number of developing countries to become more and more marginal. 6 Marked improvement in glob- al economic performance would” re- quire much stronger positive policy cooperation among —_ industrial countries — to reduce long-term U.S. demand for credit, to increase the import/GDP share of other major countries and blocs, and to dampen interest and exchange rate volatility. In a more buoyant environment, higher trade growth would result from accelerated diversification of trade patterns as well as from a rel- atively expansive environment emerging from the Urugnay Round. This scenario could result in word GDP growth of about 4 percent range and world trade growing between 5.5 and 6 percent on average through the — mid-1990s, Increased confidence and liquidity could substantially improve the prospects for managing the debt, al- though probably not to the point where existing liabilities could be fuk ly serviced. 1. Latent in the low-growth sce- nario is the possibility of world _re- cession or a global shock. This would probably be initiated by a fi- nancial crisis surrounding the U.S. deficit, triggering exchange and fi- nancial market destabilization, OBCD recession and dramatically “reduced export prospects. A U.S. financial crunch would probably quickly spill over into a generalized payntents cri- sis for highly indebted countries, and strong contractionary effects in most developing countries. It is an_ open question whether such a shock would be followed by concerted action to deal with the underlying causes and put the global economy on a high growth path in the later 1990s. 8. Underlying these trends are long-run global political and economic changes. Financial integration is increasingly subjecting all countries to the (sometimes erratic) disciplines of a global finan- cial marketplace. The world has become more multipolar politically and economically, and the current rapprochement between the superpowers will accelerate the emer- gence of more varied intern nal relationships. These currents of dif- ferentiation are also, of course, strongiy evident among the Bank's own borrowers. The re-emergence of Japan and Europe as major centers of economic and political power underlines the significance of the trend towards a multipolar world. Many of these developments will be greatly influenced by how well the Soviet Union succeeds in the prolonged process of economic and political reform which is now getting only haltingly underway. possible Developing Country Challenges 9. None of the above offers an easy environment for developing countries, save under the most be- nign (and unlikely) set of outcomes. Over the coming decade they will have to find ew answers to pressing development problems, but answers specificaily tailored to an in- creasingly wide range of individual country circumstances. This paper is neither the place to spell out a comprehensive listing of all such issues, nor to Gill in the implicationsfor each region and country. The reader's assessinent of the validity of various options in this paper, however, will need to take account of their relevance for various groups of Bank borrowers, This document focuses on three common problems identified in earlier work and con- firmed during the Bankwide consultations to be of central impor- tance, 10. First, all buts few developing countries will face severe resource scarcity. During tle 1080s, a limited number of developing countries -- most notably the Asian NICs ~- have been able to make the transition from heavy dependence on official resonrces to self-generated growth reinforced by easy access to external resourees in the private sec- tor. During the 1990s, a few more countries will move up the Indder in a similar fashion, But for the vast majority of developing countries along the entire spectrum from the very poorest to the upper echelon of middle-income countries, the 1990s are likely to be marked by limited availability of resources — both for- eign and domestic -- for adjustment, vestment and growth, HL. Second, shortages of human resources, technological and institu- tional capacities are —_ severe constraints on development. Human resource development is critical to economic — growth and poverty reduction, but it is falling behind in more and more countries — not only in Sub-Saharan Africa, Especially in an era of explosive technological change, widespread acquisition of both broadly besed general education and technical skills is necessary for development - and the skills aud knowledge required to remain competitive, grow and meet social demands are increasingly glial in character, Institutions whieh can promote and manage the required educational, economic and techinologi- cal changes are weak or absent. most developing countries, bit have to be made effective at all fevels from broad social governance to individual enterprises aud ageucies. 12. Third, environmental sustain ability is emerging as a pervasive factor in the development process, and is posing unfamilinr technical, economic and political dilemmas for development. The relationship between environmental problems and poverty, in particular, gives rise to some of the most serious and complex problems -- and especially so in very poor countries trying to manage the pressure of population growth on often fragile ecologies. Environmental factors may uo longer be treated as of secondary importance, but will increasingly need to affect basic decisions made in nearly all sectors and regions. ‘The Bank’s Role and Capacity 13. The Bank's leadership and shareholders face difficult choices about how best to position the insti tution to deal with the challenges of the 1990s, Some of the questions involved are diffuse, but nevertheless require the Bank ‘to be active in providing ideas and shaping the debate -- for example, about. possible changing roles of the Bretton Woods institutions in the evolution of global economic management. 14. More immediately, however, the Bank’s leadership will necd to make strategic choices about how best to balance the prospective fi- nancial and budgetary capacity of the iustitution against the clemands likely to be iade on it, and about whether and how to try to enlarge the Bank's capacity and therebyexpand the range of options avail- able to it. Choices about the Bank's size and priorities fori the heart of the discussion in the rest of this paper. 15. The Bank has been trying in recent years to respond to virtually all the demands and needs before it. It has been dealing with an unprece- dented development crisis among most of its meinber countries, both Bank and IDA borrowers. it has been trying to respond operationally, intellectually and organizationally to the rapidly growing regional and country differences among _its borrowers and to their growing deanands for Bank services. It has introduced demanding new operation- al initiatives and emphases to ad- dress region-specific and — muore general development needs —- e.g, improving the international trade en- vironment ~ where shortcomings were perceived. These steps have been undertaken most recently wiler conditions of significant budgetary and staffing constraints. 16. These difficulties. canbe resolved in part by budget and staff growth, if that is the choice made by Bank leadership and successfully achieved in consultation with our shareholders. But whether the budget grows n little or a lot, the Bank still needs to make strategic choices: to provide a framework of development priorities to guide the selection of operational empliases and the allocation of resources to snpport them; to provide criteria for balancing its regional and country responsibilities with its global role; and to set guideposts for how 1man- agement should plan for the Bauk’s future staffing and organization, and build its comparative advantage in the international business of develop- iment.Ul, OPTIONS FOR BANK GROWTH 17. Options for the growth of Bank lending and for the role it will play in resource transfers cover a broad range: from an accelerated growth path= to, =a slow growth/retrenchment policy. The Bank can also expand its role as a catalyst, combining its project identi- fication and sector analysis skills and financial resources in an effort to mobilize additional flows from other financial interinediaries, More radically, it could conceivably restructure its own portfolio and en- courage other financial intermediaries to do the same. Each growth op- tion has different implications for the Bank's capital base, exposure, and prudential management as well as for the exposure and debt strate- gy of other international financial intermediaries. 18. A number of factors will influence Bank decisions on growth. Among the most important are the (i) external finazcial requirements of the borrowers; (ii) efforts by the borrowers to adjust aud mobilize ad- ditional domestic resources for savings and investment; (iii) growth of the global economy “in general and world trade in particular; (iv) volume of capital flows from private and official sources to developing countries; (v) level of interest rates and ‘the volume of required debt service payments from the developing countries to interna tional creditors; (vi) willingness to borrow from the Bank; — and (vii) internal constraints placed on the Bank by the limited size of its staff, the need to identify quality investment projects, and various portfolio, exposure and risk manage- ment issues, 19. Many of these factors ,cannot, be altered in the short ron. Dut over a longer period, strategic decisions by Bank — imanageinent tight reduce the binding nature of soume constraints. For example, if the Dank plays 2 more active cata- lytic role or becomes more involved in debt reduction programs, it can increase the volume of private finan- cial resources flowing to developing countries or reduce the required fi- nancial transfers from debtors to creditors. Similarly, decisions made today about the future size of the Bank's staff, capital base, and project pipeline will affect the volume of direct resource flows frou the Bank to borrowing countries. 20. Starting from the "base case” of the Portfolio Review exercise,l/ (which is roughly comparable to current planning level through 1992, three other options” for Brunk growth through 1905 have been identified for "illustrative _ purposes: accelerated expansion, _ levelling-off, and shared growth. ‘The first two refer exclusively to. Bank lending, can be quantified, and can also be considered as reasonable upper and lower bounds for lending levels, while the third -- which is a cot- 1/ The “base case” for lending in the Y Bhai Wied (see also Appendix B), should not be confused with the “Hbnse case” for world economic growth of the Planing Assumptions — Committee (see also Appendix A). ‘Chey othe lead to estimates for Bank net, disbursements in 1995, but start from different. premises and lead to somewitat different figuees. For example, the Portfolio Review denls with 33° countries (and repres 75 percent of the Bank's portfolio and 90 “percent of projected ending in PY88-92), whi the Planning Assumptions Committes covers 90. countries,plement to the other options — refers to the role the Bank can play in relation to other development finance actors. Table ILL summarizes the commitinents, gross disbursements, and net disbursements associated with the base case aud the first two options. (See also Appendix B). First Option: Accelerated’ Expansion 21. The first option would em- phasize an accelerated expansion of the Bank's level of lending predominantly along established lines. As the inost unlikely source of funds to finance developing country needs in the 1990s is the flow from commercial banks, possible levels of additional Bank ‘lending above the base case of the Portfolio Review can be estimated on the basis of the Bank striving to cover shortfalls in the expected levels of comunercial bank lending. For example, if the Bank were to meet about 20 percent of the US8L15 Dillion that, according to the country data presented in the Portfolio Review, is expected to flow to developing’ countries from commercial banks during 1988-1095, in 1995 the. Bank's commitments wonld reach approximately US$29 billion, US$26 billion in gross disbursements, and US38 Dillion in net disbursements. However, net disbursements from the Bank would represent less than 10 percent of the cuttent account deficits of developing countries in 1995 (see Appendix A). At this rate of expansion the sus- tainable level of lending would be exceeded in 1902,2/ 2/ Am even more rapid expausion path would envisage the Bank aiming tv provide, in addition to the level of lending’ stated in the bese nse of the Portfolio Ieview, an additional US#12.7 billion ducing 1988-1995 to dvs 22. Such high levels of lending could possibly materialize if ali planned adjustment and investment operations included in the high case of the Portfolio Review were carried out, leading to US#23 billion in gross disbursements by 1995, and additional operations were undertaken to increase gross disbursements by US83_ billion in that year. For such an expausion to be within the Bank’s current ex- posure guidelines, the flows from other lenders, "particularly the amounts corresponding to what would be “left” for the commercial banks to finance (80 percent of the total US$115 for the period 1988-95), would have to materialize. The via. bility of such a growth strategy would depend, of course, on a number of conditions being met, apart from obvious exogenous factors such as world growth and absence of exchange tate and other shocks. In addition, the feasibility of such an expansion would depend on skare- holder support for and fuuding of commensurate staff and budgetary expansion. 23. This high growth option for the Bank would provide a dramatic response to the immense needs for adjustinent and investment — int developing countries and assure the institution of a highly visible and tangible leadership role in global finance and — development act disbursements would be roughly double currently planned levels. However, given difficult conditions in shortfall of approximately 40. percent. of the “ninount supposed ty Flow fran commercial banks. ‘This would lend ta US330_illion “of gross dishursement and US$12 billion of net disbursement in 1995, and would exceed the sustainable level of lewling aud require capital increnee in 1091,many member countries and the short run intractability of budget constraints, rapid growth also poses considerable risk to the financial quality of the portfolio and quite possibly to its operational quality. A particular problem is that rapid growth based on a larger share of quick-disbursing lending would tend to lock the Bank into further expan- sion of this type of lending in order to maintain positive net disbursements: it is a short step, familiar to commercial ‘banks, from this situation to defensive leading in order to prevent arrears. Second Option: Leveling-off 24. A second option, somewhat below current base case planning, would place less emphasis on expan- sion of the lending program, and would concentrate “the Bank’s energies primarily on high quality investment operations. Depending on the specific assumptions made, this growth path would imply differ ent levels of lending. For example, cutting quick-disbursing loans to 13 percent of new Bank lending through 1995 would lead to commitment of US$18.8 billion, US$16.7 of gross disbursements, and US$2.8 billion of net disbursements in that year.3/ 25. In this leveling-off option the Bank would thus expand at a much slower pace, take a_hiighly conservative approach to the man- agemtent of risk, move away from presently high ' levels of quick- x An even more drastic —_recluetion, u explored in the low ense of the Portfolio Review, would eliminate all quick-disbursing loans. This would bring commitments dowa to USStIA billion, gross disbursements to US$9.7 ny and age disbursenténts to USSO.8 billion in 1995. disbursing adjustment lending, and try to maintain the political consen- aus underlying its staff and’ budget strengths by emphasizing high-calibre work. This would lead to a dimin- ished role for the Bank in resouzce transfers, and would shift the burden of debt resolution and adjustinent towards others ~ the Fund, the commercial banks, aud major credi- tor governments. 26. The leveling-off option couid preserve or increase the quality of operetions, and also improve the Bank’s portfolio as no bold efforts would be made to offset declining flows from other sources with the subsequent increase in Bank expo- sure. But this option too has costs: possible reduction in policy influence, a diminished role in heip- ing meet developing countries’ fi- nancing and development needs, pressure on country relationships aud on repayments as net disbursements diminished, and the potential erosion of shareholder support. Third Option: Shared Growth 27, The “two preceding options set basic growth alternatives in bold relief, (Current plans are roughly in the middle of this range.) Bank de- velopment can also be addressed hy focusing more on how the Bank increases its impact by sharing to a greater degree responsibilities. and opportunities with other participants in the international fnancial system. A third option, which could be seen as a complement to other growth paths, would thus build upon existing collaborative relations with other funding agencies and maintain an expansive stance, but one based on increased burden-sharing and shared growth. This option wonid increase the Bank's role as collabora. tor with borrower countrygovernments, the Fund, regional de velopment banks, bilateral agencies (especially new or expanding entrants such as Japan), and international sources of private finance for devel- opment. 28. Some possible features of shared growth are discussed in the context of Bank actions in resource mobilization (see Section III below), and include debt reduction, credit enhancement, catalyzing investment, and restructuring the Bank's portfolio. It is difficult to estimate size of resource flows associated with Bank operations in this option, but cofinancing and credit enhancement operations could at least double the amount of direct Bank lending, and substantial amounts of debt could be reduced through more active Bank intervention. 29, The options for Bank growth outlined in this section represent Judgments about desirable paths and rates of Bank expansion, and about the way the institution can best de- ploy its financial strength to serve the interests of development in the 1990s, In effect, they constitute dif. ferent responses ‘to the financial maturing of the Bank, which is *premature” from the viewpoint of the resource needs of many member countries. Each carries advantages, risks and substantial uncertainties, and each implies somewhat divergent operational strategies for the Bank and different consequences for the internal management of the institu- tion. In particular, there are likely to_be marked differences in the sig- nificance of such choices for different groups of countries, which mannge- ment will have to balance within the overall strategy of the institution. Management guidance on the inost reasonable and viable direction for the 1990s would help set the framework for the areas of priority emphasis in the Bank’s work.TABLE Tra GROSS AND NET TORO DISEURSEVENTS UNDER OIFFERENT GROTH OPTIONS (5 Mi Niors) rea ~ FY95 TOTAL RATE 18859.0 19608.0 194030 23679.0 28826.0 27498.0 Levelling off _15308,0 1786.0 isas9.0. 262800 6102.0 1724.0 18i73.0 Grose Disburnementa CRO a Carel reg ~ FYE TOTAL "RATE 17801.0 16476.0 112461,0 6-8 0 41487,0 1366.0 14660.0 15394.0 Aceelacated Growth 1487.0 13368,0 6465.8 18252.3 Leveiling Off _ 11487.0. t3908,0 12706. Net Dieburaanants -FYe9 = FY9S TOTAL "RATE 4326.0 4798.0 4084.0 4122.0 30730.0 4476.0 8447.0 920.0 2713.2 2795.2. 03 Levelling OFF 3724.0 4879.0 2986.2 Movees erated Groxth = The Worid Bank undertacer to finance «25% shortfall in axpacted ‘conearcial bank tending through the mid-1900"s, reduced to 16% of total lending. + FPS for Pane Cane SPH far Accelerated Groth and Levelt 9 Off-10- Ill. STRATEGIC DIRECTIONS 30, As indicated in Section I, there are three major overarching issues for the 1990s which require special attention in setting the Bank's strategic directions. through the mid-1990s: resource scarcity, country capacity to _— achieve development, and environmental deg- radation. These issues are closely linked to decisions on the proper size of the Bank and would play out in different ways in different regions and country circumstances. They confront the Bank with global concerns which cannot effectively he handled on a business-as-usual basis and point out towards three strate- gic directions: mobilization of finan- cial resources, human capital formation, technological and institu. tional development, and environmen- tal sustainability. 31. Decisions on priorities such as those discussed in this paper will alter the Bank’s focus over time, leading to changes in the allocation of financial and’ staif resources and in the range of | fture Bank activities, But it ean no longer be assumed “that ad hoc decisions to strengthen one area or another of the Bank’s program can simply be adopted as add-ons to existing priorities. Unless there is an unex- pected lessening of pressure on the budget, the Bank will need to make conscious choices, start restructuring budgets, and work out long-term understandings with shareholders, borrowers, and others active in the development business. Even with a more expansive budget, consider ations of development effectiveness, efficiency and the Bank’s overall manageability push in the same direction of trade-offs and selectivity. That is why the issues of strategic directions and priorities need to be urgently addressed. 32, Mobilizing financial resources for development is fundamental to the Bank’s business; there can be no serious question about its central role as a strategic direction for the Bank in the coming: decade. The environment for both international and domestic resource zuobilization has changed radically, and the difficulties have increased for developing countries. A. Mobilizing Financial Resources 33. The Bank’s leodership faces important strategic choices about how best to support development re- source mobilization in the new cli- mate anticipated in the 1990s, about how to use its own resources to help generate required jevels of inter- national development finance, and about how to encourage efficient re- source inobilization within developing countries themselves in order to support faster growth and poverty reduction. 34. The Bank’s role in mobilizing external finance ~ and that of other international institutions such as the Fund and the regional banks imust therefore be examined against a backdrop of $85 billion of net transfers from developing to developed countries since 1982, the stagnation of official development as- sistance and of direct. foreign investment, a precipitous decline in commercial bank lending in the mid- 198s, heavy debt service burdens and large current account deficits In terms of domestic resource mobili. zation and investment, the Bank must grapple with widespread fiscaland (incipient) developing countries and constrain provide a financial crises in which distort country efforts and poor environment for external — flows, In addition, increasing the efficient, use of investment resources is a prime de- velopment contribution that the Bank makes to its borrowers, 35. Expansion of Bank Invest- ment Lending. As indicated in the preceding section, part of the Bank’s response to these problems can be addressed through its own financial capacity. While IBRD net flows to current borrowers remain positive, total net transfers turned negative and will not, on most _ plausible assumptions, improve siguificantly in the medium term. IDA’s resource transfers are strongly positive, but face the different problem of short replenishment horizons and uncertainties regarding the level of donor resource commitments. 36. One obvious ronte wonkd be for the Bank to expand project and, increasingly, sector lending for infrastructure, agriculture, industry and energy on which its track record and global expertise-have been built. Lending for environmental projects could be very large ag well. There is a massive need in most developing countries for both rehabil- itation and new investment, and a major expansion of Bank project and sector lending should be possible if increased attention is focussed on this feature of the Bank's program. However, the widespread lack of in- stitntional capacity and domestic budget resources, especially for recur- rent costs, constrain the efficient ab- sorption of investment finance in some countries. In such cases a sig- nificant increase in project and sec- tor loans may have to be preceded or accompanied by _iuistitutional development, and by fiseal * reform one and domestic resource imobilization efforts on a inuch greater scale than presently. This having been said, there should be considerable room for growth in Bank investnient lend- ing. 37. The Bank as an Investment Catalyst. The Bank could also play a more active role as a catalyst to mobilize external finance from a va- riety of private and public sources, linking them to its own investinent and adjustment operations. Consid- ering the improbability (and even undesirability) of a resumption of large-scale syndicated — commercial lending, improving the economic en- vironment and financial systems in developing countries is critical to the mobilization of private external resources. But this will not be enough: direct encouragement of private funds will be necessary, and every catalytic method available should be used to enlarge sich flows. While MIGA aud IPC are increasingly important. in this respect, the scale of their operations is still’ limited. In addition, major sector-type investments also typically give rise to important public policy and pubtic finance issues in which the Bank’s involvement is appropri- ate, 38. An expanded catalytic invest ment role would leverage Dauk lending by associating additional flows from other sources with Dank operations, .and “may — thus be perceived as offsetting declining Bank net disbursement and net transfers to borrowers. It would also enable the Bank to complement its finance. ing role by assistance in the design of investinent projects aud programs that involve other sources of funds, thus increasing the total voluine of lending associated with staff tine,30. The Bank’s function would be to take a leading role in putting together the financial and technical components of investment packages on a sector or investment program basis, and where appropriate to play a coordinating role in securing the best possible mix of financing by the Bank itself, other official donors, export credit agencies, conimercial banks, equity investors ‘and suppliers within a macroeconomic and sector framework agreement with the borrowing country. On the basis of past experience (B-loans, cofinancing), spontaneous private sec: tor participation in investment packages is likely to be limited to the creditworthy countries, and Bank guarantees and/or a wide range of financing arrangements would be necessary to induce private investors to move to more risky borrowers. The limited experience with proto- type operations (e.g., Pakistan energy sector loan) also indicates that the Bank’s technical capacity for investment appraisal — and its seal of approval. —- can be at least as important as any —_ financial engineering, although additional _fi- nancial skills and services would cer- tainly be needed. A careful choice of countries, of sectors (e.g. energy) and of the elements involved in the financing package (e.g. provision of working capital) would be required to bring about new forms of interna- tional public/private investment partuerships. 40. Leadership in Coordination of Resource Flows. The Bank’s leader- ship role in mobilizing official resources for investment has become increasingly demanding in recent years and could expand further dur- ing the 1990s. Consultative groups have been useful instruments for this purpose in the past and will contin- ue to be appropriate in many cases. The role played by the Bank's w 12+ Africa Region in_mobilizing resources and organizing donor support on a regional (but selective) basis has moved far beyond previous levels of involvement in ways perceived as very useful by donors and recipients alike. Here and in other settings, coordination is no longer focused only on ODA flows, but on the whole range of finaucial flows appro- priate to the country. Public expen- diture reviews have become impor- tant components of enhancing effec- tiveness of resource tse. The Bank's future involvement in nid co- ordination requires further strength- euing of development impact through better cooperation with donors at the local level, and the evolution of a sensible division of labor among donors. A major Dank effort to help Japan’s aid prograin become a more effective, reliable and enduring developmental force should be a high priority. The Bank could also use its "convening power” and its inter- national standing more aggressively to obtain major donor commitments and finance for regional and problem-specific programs (e.g. the Consultative Group on International Agricultural Research, the Mediterranean basin project). 41. ‘Trade, countries trade For most developing will provide the major source of foreign exchange resources for growth, The Bank's ability to influence industrial country governments is limited but not iusig- nificant. The Bank can strengthen its | development impact by highlighting, through research, analysis, public statements and persuasion, the importance of open access to developed country markets that would enable developing countries to increase export earnings eg. the Bank’s active role in ene couraging the GATT’s Uruguay Round).42, However, the staff time necessary to play the catalytic investment, coordination and matic roles is substantial. doesnot generate additional Bank Jending, it contributes to increases in resource flows, effective use of resources and to the overall develop- ment effort in numerous valuable ways. But these activities add to the Bank’s administrative overhead unless performed on a cost recovery basis. 43. ‘The Bank’s Role in Debt Re- duction. The debt overhang is a se- rious impediment to the resumption of investment and growth in many countries, ‘The Bank could play an active role in debt reduction for highly-indebted countries that are undertaking reform programs but confront steadily worsening balance of payments and debt service problems. Should management wish to take initiatives in this area (and shareholders were to agree), several options are available to the Bank: fmancing the repurchase of debt at a discount; providing guarantees for exit bonds involving principal writedowns or interest rate relief; helping design and monitor adjust. ment prograins tied to debt relief, cooperation with the IMF; and, should agreement between creditors and debtors warrant such roles, pro viding the technical expertise to as- sess a country’s capacity to pay and management services for debt reduc- tion schemes. These roles could be played without abandoning the case- by-case approach to voluntary debt reduction, and do not require the es- tablishment of a new institution or facility. Appendix C provides one iMustration of how this could be ac- complished. 44. More active Bank —involye- ment in debt reduction could mobi- ve external financing for heavily in- a13- @ebted countries but would require substantial staff involvement in the design and monitoring of adjustinent programs, a willingness to take on the technical and — adininistrative burdens associated with debt relict, and above all a willingness and abil ity to take a clear lead in a politically sensitive area. Such a role in debt reduction would have implications for Bank capital requirements only if Bonk resources were to finance debt repurchases, if the Bank were to guarantee new’ or reorganized assets, or if the Bank were to restructure its own portfolio, The use of speciat funds -- conceiv- able with the participation of donor countries, debtors and even commercial banks + would be a more attractive option, and one in which Bank services could be provid- ed on a cost-recovery basis. 45. Adjustment Lending The main focus of resource mobilization efforts, however, must be within developing countries themselves, and here the Bank has two main approaches at its disposal: structur- al adjustment and sectoral adinst- ment lending, particularly financial sector adjustment (even though agricultural, industry and trade restructuring also play a significant role in domestic resource mobilization). A sound macro- economic “policy framework is necessary to increase dnmestie savings and improve the allocation of investment resources. Quick- disbursing adjustment’ lending provides ‘external finance to under: write the costs of policy reforms in borrowing countries, and contributes to domestic resource mobilization. Tt also focuses on trade policy teform that improve the elliciency of tesource allocation and generate for- eign exchange earnings. However, because of its general balance of payments end-use, adjustment lend-ing raises concerns about how far it actually contributes to domestic re- source mobilization, 48. Quick-disbursing adjustment loans also have serious implications for the profile of net disbursements and transfers to borrowers, and for the riskiness of the Bank’s’ portfolio. Prolonged adjustment efforts are dif. ficult to sustain, particularly in an adverse and uncertain international environment, and assuming the initial gains from major policy reforms have been obtained, there may be diminishing returns to subsequent adjustment —_lending operations designed to fine-tune policy frameworks, These considerations, added to the fact that the Bank’s adjustment lending prograim depends on country political coumnitments difficult to anticipate and beyond the Bank's control, sug- gest that — unless the Bank decides to assume greater financial risks -- the proportion of quick-disbursing adjustment operations in Bank lend- ing should not exceed its present levels. Transition strategies involving hybrid” loans or other instruments which combine quick and slow disbursement might assist in reducing the proportion of quick- disbursement lending, while minimizing the adverse net flow and net transfer problems for borrowing countries. 47. Financial Sector Restruc- turing. The role of the financial system is crucial in domestic resource mobilization and allocation, Bank operations to restructure the financial sectors in developing countries are aimed at increasing savings and the efficiency of the f- nancial system in intermediation, This requires an appropriate legal framework, effective supervision, and the capacity to enforce regulations 14. and contracts in the banking and fi- naucial services industry. 48, In many developing countries a large numberof _ financial institutions are effectively bankrupt, and a potentially huge restructuring of public and private financial intermediaries will ultimately be required. While there is considerable scope for the expansion of Bank activities in this ares, the Political sensitivities are great, and effective interventions could involve substantial amonnts of — lending resources and require skills and ex- pertise presently in very short supply. 49. Alongside the resolution of fi- nancial distress, there is a longer- term task of deepening the financial system in many developing countries, and in particular of — developing capital markets (as IFC has been doing in some countries) both to mobilize and allocate domestic resources and to effect better linkages with international sources of direct and portfolio investinent. This is a very long-term enterprise in most developing countries. 50. These various lines of action all offer important ways for the Bank to expand and deepen its strong commitment to resource mobi- lization -- including debt reduction — in the 1990s. But a growing hase of human resources, technological capacities, and effective public and Private institutions is necessary for developing countries to. use investinent resources productively and to assure that the benefits of economic growth are more equitab distributed. The second strategic di- rection addresses these issues.B. Human Capital Formation and Institutional Development Bl. The decline in living standards and the persistence of poverty in developing countries, as well as the sharp deterioration in social conditions during the 1980s after nearly three decades of substantial (if uneven) improvements in population, health, nutrition and education, constitute the background for the second strategic direction that emerged during the Strategic Agenda consultations: the need to strengthen the development of humaa, technological and institu- tional ' capabilities in developing countries, Although highly effective individual operations can be identified, these are areas in which the Bank has not had remarkable success, nor has it been a primary feature of the Bank's work. Nevertheless, its priority is so high and the constraints of past neglect imposes so significant, that a strate. gy without these key elements imay iiss the task most urgently needed. 52. The Bank has long recognized that resource mobilization and policy . advice will only be effective to the extent they are fully absorbed and institutionalized by its Dorrowers. It has periodically restated its commitment to human resource development during the last forty years. However, most atten- tion and energy have been focussed on tha task of providing loans for infrastructure and productive activities, and more _receutly to support broad policy reforms. While these loans often involve some in- stitution —brilding components (primarily, technical’ assistance and training to establish or strengthen government units or —_ agencies associated with the loan), the Bank could move well beyond an add-on approach to human capital formation as. and technological development. and institutional 53. Furthermore, it is increasing- ly clear, especially as deinocracy spreads more widely, that participa- tion of —grass-root movements, professional "groups, community organizations and other NGOs in the design and implementation of devel- opment strategies will be important to their success. Well _ developed human, technological and institution al capacities are necessary to make effective the potential contribution of these groups to the development process. 54. The social sectors have not accounted for a major share of Bank lending during the last decade, aud Jending for population, health and nutrition has averaged about 2.5 percent of total IBRD/IDA lending in recent years, and education projects have averaged about 4.5 percent of lending since 1962. The Bank has been slow in recognizing the importance of supporting the de- velopment of country capacities to absorh new technologies and to innovate; investment operations have seldom treated these issues explicitly and only a handful of projects spe- cifically designed to address them have been supported. In addition, although institutional development issues have received much attention in recent years, particularly in the context of public sector management reforms, the Bank could play a much more activé role in view of the magnitude of the problem, and the importance of local institutional capabilities for Bank operatious and development efforts in general, 55. A_aumber of factors account for the Bank's limited involvexnent in human capital formation and in- stitutional development. ‘The com plexity of the social and culturalfactors, the politically seusitive na- ture of interventions, the lack of ad- equate technical staff with skills and extensive field experience, the limited foreign exchange and import content of operations in social sectors, the reluctance of countries to borrow from the Bank for these purposes given the hardness of terms, the lack of appropriate lending instruments and services, and the structure of incentives for managers and staff have all combined to make human capital formation more a use- fal adjunct to investment and ad- Justment operations, rather than a strategic direction for the Bank. These are not simple problems to solve and can be overcome only through a major, fundamental com- mitment to these areas as Dank priority objectives, 56. Human resources develop- ment. The quality of human resources is critical for economic growth and poverty reduction, and investments in human capital are a prerequisite for development. The Bauk can significantly expand its ‘commitment and — support for population, health and nutrition, and education programs through lending, technical assistance, policy advice, research, training and information. They are closely interrelated issues that require an explicit treatment of complementarities and linkages (e.g. women’s education appears to be an elective way of reducing population growth, nutritional improvements may lead to significant achievements in education), even though this creases project and program com- plexity, 57, all the But the Bank does not have answers to these difficult problems and there are limits to external interventions aimed at improving human capital. Sustained country conunitment is essential for -16- success, and this requires the will ness to introduce and sustain poli reforms, the continued provision of 5 recurrent expenditures to support human resource development, organizational and = managerial capacities to administer large-scale programs efficiently, aud government openness to accept the potential con- tribution of community organizations and other — independent —_ local movements. Moreover, for the Bank to be actively involved in IDRD countries, especially when grant mon- ey may be available from official and private donors, it_will often be necessary to associate Bank programs with resources provided by other donors, 58, Many other donors have worked in human resource develop- ment over the past 40 years, including foundations, UN ageucies, bilateral’ aid agencies, regional banks and NGOs. — Increased collaboration with such groups will be very. im- portant. While there have been many individual successes aud siguif- icant achievements during the last 40 years, no donor has been out- standingly and consistently successful, which attests to the inherent difficul ty in achieving satisfactory results. The most successful donors have probably been the Ford — and Rockefeller foundations with their Programs to support research and education (prior to their financial retrenchments in “the imid-1970s}, USAID in the 1960s and early 1970s with its support of development ad- ministration and population programs, WHO through the 1970s and 1980s in health care programs, UNICEF in the 1980s in ficlds like Oral Rehydration Therapy, the Canadian Iuternational Development Research Center (IDRC) with its Tesearch support activities during the 1970s, and a few smaller NGO organizations — which developedspecialized knowledge in these areas, Their operations were frequently dependent on extensive field staffs with good understanding of the focal situation and the ability to provide continuous and flexible supervision duriag implementation. 59. Technological capacity. Despite the importance of technology issues for development the Bank has done little to address them. The Dank could provide greater support for the establishment of technological institutions appropriate to country ueeds, and the more efficient use of existing technological —_ capacities through loans, technical assistance and policy advice. As borrowers in- tensify their links with the world economy and as adjustment proceeds, competitiveness and supply response requicements will make it necessary to strengthen education and training institutions, research and design centers, technology extension and in- formation services, and quality control and metrology services, An efficient network of technology service institutions is also required to support and promote productivity improvements geared to satisfy basic needs in rural and urban areas. 60. The Bank could also expand its operations to finance technological innovation in developing countries, supporting institutions that provide ventiire capital, credit lines for the development and _cormercialization of technology, and finance technology imports. Policy advice and technical assistance in the establishment of fiscal incentives for innovation may also be involved. Taking advantage of Bank technical expertise in select ed fields, the provision of an expanded range of technvlogy services formation, technology assessinent, training) for developing conntries is another option to be considered. <47- 61. The support for Dank provides agricultural research through the CGIAR, and it also funds’ research in other fields such as health and economics, Develop ment research needs are practically limitless and the Bank could easily expand its research support for and grant in developing countries through grants, research contracts and by sponsoring the establishuent of an independent research support organization or institute, financed in part from Bank profits. 62. The Bank has limited experience in operations specifically designed to support the developnient of tecinological capacity. Technolog- ical considerations have usually been dealt with at the project level, and only a handful of sector- or nation- wide projects of this kind have been financed. These appear to be rela- tively small operations requiring technology policy skills that are in short supply in the Bank. 63. But the Bank’s role in tech- nology transfer and — development could be even more important and have far greater impact by assisting developing countries. to take advantage of the __ technological advances associnted with the infor- mation revolution. Opportunities are continuously expanding for the use of microelectronics, informatics and telecommunications’ in a variety of productive and service activities. With few exceptions, developing countries have not as yet heen able to take advantage ofthese opportunities. Indeed, many are not even aware of them, G4. As no ready ing possible Bank interven develop technological capacit available, and as’ the erucial jimpor- tance of technological capacities for nswers regarddevelopment is being recognized, a systematic examination of options open to the Bank ~ possibly by a vice-presidential level review group — is urgently required, 65. Institution building. — Institn- tional constraints in developing countries, including —~ liauited managerial, policy making and. ade ministrative capaci ‘ies, must be re moved for developing countries to carry out successful development efforts. The Bank's recoguition of institutional development. has increased in recent years, particularly with adjustment operations, but cov- erage of these issues is still uneven and unsystematic, The traditional approach adopted in project and sec- tor lending has been to create islands of institutional modernity, of- ten augmenting the country’s imple mentation capacity with foreign tech- nical assistance and project imple. that mentation units are unsustainable without continued external support. 66. The Bank is planning to greatly expand its support for the development of the private sector, seeking to mobilize the energy and entrepreneurship of private business for development purposes. This involves policy advice to create an enabling environment and give a greater sense of direction to private initiative; an expanded Bank lending program and more operational support for capital markets, private financing and operation —of infrastructure, and the promotion of private investinent; and an expansion of advisory services and operations in IFC and MIGA. These actions could remove the constraints and provide direct support for the devel- opment and consolidation of private sector institutions, -18- 67. The Dank could expand its support of public sector management end public enterprise reforms, primarily through lending, training, technical assistance, research and in. formation services, These are usual ly small, staff-intensive operations that involve high project. preparation costs (e.g., _ technical assistance operations require about 4.8 times the average number of staif wecks per dollar of lending), but are essential for the success of other Bank operations. The challenge is to move beyond specific .iuterventions and adopt a broader perspective on the institutional and adiuinistrative capacities needed to manage the economic, social and —_ political transformations associated with devel opment. 68, The Dank could expand its support for the development of local policy analysis and design capabilities, whose weakness is a critical constraint in most developing countries -- particularly in relation to macroeconomic management and adjustment. While inost middle-in- come countries have a number of policy research centers, ustially associated with universities, wirich concentrate well-trained and experi- enced policy analysts that constitute @ reservoir of talent on which the public and private sectors draw, the situation is quite different in’ the low-income countries, and particular- Jy in Sub-Saharan Africa. Moreover, economic and fiscal crises reduce public and private support for policy analysis and research, and often lead to drastic and sudden reductions in policy analysis = and design capabilities, 69. This may involve assisting developing countries in setting up mechanisins to finance policy oriented research, — increase Bank support thorough’ grants and themobilization of other sources of, research funds, the extensive use of research contracts and fellowships, expand training programs and the exchange of experiences through the Bank's) Economic Development Institute, and provide information and dissemination services to policy- oriented researchers in developing countries. 70. Partly as a result of the de terioration of living standards that heightens social tensions, and of the need to adjust to a world of greatly increased international competitiveness, developing countries are facing the problem of devising and strengthening workable social institutions to achieve growth and distribute ils benefits. A’ number of major changes and adjustinents in Tegal systems, the relations between the public and private sectors, the relative balance between planning and markets, and in property rights and entitlements will be required for developing countries to deal with the complex issues of governance, social organization, and the distribution of claims on the social product. As countries struggle to establish and sustain more open and democratic forms of government, it will be necessary to accommodate —_ the gronter demands for participation made by the civil society in general. 71. The Bank could take an active role in addressing the problems of governance and social transformation in __ developing countries. Given the limited knowl- edge avaiinble on these issues and the changing nature of the problems, the Bank could support research and promote the exchange of experiences, seeking to offer a fertile ground for analysis and _ reflection. In particular, the Bank has evolved a more or less coherent view of the kind of economic strategies most 219+ developing countries are likely to need if they are going to restore or increase growth, complemented with ideas on how to ameliorate distribu- tional problems. But the Bank has no comparable coherent view about the political and _ institutional arrangements required to underpin those economic strategies, in general or in particular types of countries. This is an area that requires urgent ” attention. C. Environmental Sus 72, The third strategic direction for the Bank represents o recogutition of the severity of the environmental constraints that developing countries face now and will increasingly face in the future. Pressures on natural resourees intensify daily, and hundreds of millions of people living in absolute poverty destroy the resontees on which their — fnture depends because no alternative is open to them. 73. Since the reorganization, the Bank has established its environmen- tal effort on a broader and stronger footing, and several basic thrusts of the program have heen decided upon and are now wnder development. ‘These involve the incorporation of environmental considerations into Bank operations and the develop ment of policies and approaches to deal with national and wider envi ronmental problems. 14. The major start-up decisions related to this strategic direction have thus alrendy been taken and work on a strategy statement has begun. Pour regional environmental units have been created to focus on project enviromental impact, intro ducing environmental considerations in country work and developing specific operations aimed =— atenvironmental preservation and regeneration, The central Environ- ment Department will focus on policy and research activities ina range of technical, economic and social areas, provide support to re- gioual staff where conceptual guid- auce and specialized expertise is required, develop methodological tools for environmental assessment, and establish and maintain information systema and data bases. 73. It is thus expected that the number of activities _ specifically addressing environmental sustain- ability = through lending, policy advice, technical assistance, project review and conditionality — will increase significantly through the 1990s. In addition, analyses of imajor environmental’ issues and country studies will focus and dis seminate the Bauk’s intellectual contributions in this area. 76. Dank action on regional and global issues will focus on the severe environmental problems in. Sub- Saharan Afrien, the threat of tropi- cal deforestation, and pollution in the Mediterranean basin. These interventions involve exerting the Bank's convening power and leader- ship to mobilize a variety of govermuent agencies, international organizations, bilateral agencies, sci~ entific societies, research" and academic centers, the private sector, and NGOs in devising and implementing solutions to critical en- vironmental problems that cut across countries. 77. Several questions remain to be addressed from a_ strategic perspective, however, —_ basically invoiving judgments about the long- term developiuent significance of en- viromuental initiatives in the Bank. 78. First, environmental work will become- a substantive part of the Bank’s activities by the middle of the next decade, and should by then be mostly free of its initially defensive overtones. But this scale and orientation of effort will not make the environmental dimension « central component of the Bank's approach to development. The cur rently chosen option is to treat the environment as something between a special emphasis and a minor sector. An alternative option would be to acknowledge that mismanagement of natural resources is very custly to developing countries and to regard environmental sustainability as central to the design and implemen- tation of development strategy. The name of the IBRD might even be changed to IBED -- the International Bank’ for Environment and Develop- ment — to symbolize the significance of this change. If this were to be done, the Bank would need to make a_major intellectual and operational effort to reorient development policies in the direction of resource- conserving and environmentally be nign growth. 79. A second question (which can be assessed partly independently of the first) is whether the Dank’s work at the country level should be broadly based to cover ail envirou- f iasues, or should focus on ular major themes. Given developing country energy needs, one such theme could be energy and the environment, for example with a major Bank’ effort to address the en- vironmental implications of nuclear, thermal and hydroelectric investinents, and to develop better complementarity between miacto- and microeconomic policy choices and the development and use of different en- ergy tesources, The Bank say also focus its attention on the environ mental consequences of acceleratedurbanization and of the growth of megacities in developing countries. Another choice would be to concentrate on the linkage between the environment aud poverty. This would focus Dank effort on issues such as population and migration policies, household energy, the ecolo- gy of small-scale agriculture ‘and food security, and the links between enviroment and basic human services such as preventive and primary health care, but perhaps give less attention to industry and major energy and _—_ construction activities. 80, A. third qnestion arises from the Bank's experience of how its global character and "convening power” can thrust it into unsought leadership. A. similar process nay well be getting underway in the case of the environment. One option would be for the Bank to set clear Junits (difficult though this might be “ais politically) to its environmental reach, and deliberately to avoid a wide international role. An alternative strategy would be to an- ticipate that such a role is desirable or inevitable, and to plan progranis and resouzces to deliver what will be required: eg., playing a prominent part in the likely renewal of interna. tional action over the management of the global commons (particularly the exportation of marine resources), promoting and financing cooperative research, and action on potential en- vironmental threats such as toxie waste disposal, ocean and space dumping, and — global — warming. However, a more active Bank roie in these global environmental programs would require the establishment of a new fund or grant program, or the creation of a new Bauk affiliate. Current practices limit IBRD/IDA lending to individual country governtnerits.IV. OPERATIONAL IMPLICATIONS 81. The three strategic directions described in the preceding section will have operational —impiications that relate to the regional and country dimensions of Bank work, as well as to capital requirements, ‘the Bank’s product — line, staff deployment, relations with other agencies, to the special emphases and their evolution over time, and to the organization of the Bank. 82. Regional and = Country Differences. A basic issue for senior management is how to assure that the global character and identity of the Bank is not lost in a morass of highly specific “country _ activities. One approach is to agree on directions such as these that have global relevance, but recognize that the relative emphasis placed on each ~ as well as on the different lines of action they comprise -- will vary according to the specific conditions prevailing in each country and region. " For example, the Bank's interventions as a catalyst for investment finance must be tailored to individual country situations, as each country’s ability to atiract capital and debt structure is unique, and as the sources of finance will differ in each case. It is also in- creasingly clear, however, that re- gional categories -- with the current exception of Sub-Saharan Africa are less significant now as great di- versity in country situations is found within each region as well. 83. The Bank's commitinent to Sub-Saharan Africa and our highly visible role in resource mobilization, added to the intractability of African development problems, deserve special consideration. Continued and substantial improvements in economic policies are essential; an emphasis on virtually all aspeets of human capital formation and institutional develop: ment is necessary for economic progress in the region; the expausion and improved maintenance of basic infrastructure and productive investments are urgently needed; and sustained aid coordination | and concessional resource mobilization efforts will be required to underpin African development efforts through the 1990s. The Africa Region is al- ready far along on a major long term strategy document —_ that emphasizes the three overarching priorities described in the preceding section, and much more. One oper- ational question of strategy is whether the Bank can imauage to cover stich a_ broad sweep of responsibilities effectively. 84. Capital Requirements. ar- ring a major disruption in financial markets or a loss of the Bank's AAA rating, the Bank will continue to enjoy continned access to the i ternational capital markets on the basis of its paid-in and authorized capital. The recent GCI provides the Bank with a capital base to ac- commodate up to about US$22 billion of annual commitinents (with the precise level dependent on interest and exchange rates). ‘The accelerated expansion option discussed in Section II above exceeds the sustainable fevel of lending and requires a new capital increase by 1992, Were the rate of growth in lending envisaged for this accelerated expansion option to be maintained through the 1990s, a capital inerease of at least US870 billion would be necessary. 85. In addition, IDA-9 and IDA- 10 replenishinent negotiations will, of course, be critical for the continued expansion of Bank operations in low- income — countries; anong thedecisions donors will need to make is the degree to which IDA continues to play its global role and whether it shifts still further toward an African focus. If that were to happen, how would the large amounts of concessional flows needed by the large poor countries of Asia be inet? — The current round of IDA-9 negotiations should help clari- fy these issues, 86. Human resources and institu- tional development, technology capac- ity building and an increased empha- sis on environmental sustainability donot usually involve large investments, either as stand-alone projects or as part of other operations. ‘Therefore, even a substantial expansion of _ lending along these directions is not likely to impose strains on the Bank's capital. Borrower interest, staff constraints, confidence in Bank prescriptions and, to a lesser extent, the need to adapt the Bank’s product line will impose lumits to expansion, 87, The Bank’s Product Line. The Bauk’s product line consists of a single dominant product (a fixed aaturity sovereign loan) supported by 2 range of nominally free” services. These range from highly specific project identification, apprais- al and supervision support, ‘to global comparative research and ’dissemina~ tion of knowledge about develop- ment. During the next decade the character of that dominant product ~ the Bank loan -- will certainly undergo changes. Vehicles will be necded for an effective transition fromm quick-disbursing to other forms of fending in support of adjustment fog, Phybrid? loans “and snultivear finaucing agreements), and variations in terms and conditions (e.g. variable loan price structures for dif. ferent borrowers) may be necessary to imaintain the Bank's setive 28. presence in all regions which is essential to maintain a global out- look and mandate. 88. If the Bank is to he au effective catalyst for investment fi- nancing it will have to develop instruments to tap international capital markets aud to nuobilize private flows to developing countries, as well as to employ financial wholesaling techniques while resolving the problems presently experienced int lending through > financial intermediaries, It will have to work out its own role vis-a-vis that of IFC and MIGA in encouraging risk, capital and in particular equity investinent —withont —_ introducing inefficient distortions in capital markets. And it will have to devel op investment packaging techniques which utilize the Bank's core project and sector skills within a larger fi- nancing framework. 89, For human resource develop ment to become a major focus of Bank activity, substantial product in~ novation willbe needed to deal with the long-term nature of returns to human ‘resource investinent (and therefore the reluctance of countries to borrow on Bank terms for these purposes), and to deal with imainte- nance and operational costs of human services as well as investinent in the physical infrastructure {schools, clinic buildings, workshops). Given the nature of these sectors, the Bank may not wish to express its goals in quantitative lending terms. Another product innovation could involve expanded grant support for developing conmtry NGOs, training centers aud research organizations to improve the delivery of ‘social services. The Bank conld also consider the establishment of an international center or other freo- standing unit, supported from the Bank's profits or from special donorfinancing, to carry out research, prepare programs in this area, and provide technical assistance and in- formation services to Bank clients, 90. Technology transfer and ca- pacity building activities would also require major innovations in the Bank's product fine, Research support activities that would build upon and expand on the experience of CGIAR to other areas would make significant contributions dispro- portionately large in relation to the resources involved. Technology as- sessment and information services, technology policy advice, and techni- cal assistance to build local capacities in selected priority areas (eg., information technology) cond be a highly valued addition to the range of Bank products and services. 91. The Bank will also need to devise more effective vehicles for tackling institutional development problems, particularly when these are "systemic" and. transcend the man- agement problems of _ particular agencies. Given their very long-term and sometimes regional character, their small demands for capital resources and very high requirement of skills and people, it may well he necessary for the Bank to find dif. ferent ways of financing and addressing institution building: for example, by actively sponsoring and participating in regional consortia with foundations and bilateral assis- tance agencies. 92, Many of these prodnct-related issues underline the broader fact that the Bank's range of services has heen growing over the years, as has expenditure on them. This tendency shows every sign of continuing and both equity and budgetary pressures suggest that they should be priced and their costs recovered to a judicious extent — either by qharging = 24- beneficiaries directly or, __ where appropriate, by sectring additional concessional finance from the interna- tional community to meet agreed needs in low-income countries. In the case of the SPA for Sub-Saharan Africa this has not proven successful, although in many other ways the Bank is being supported by bilateral aid donors. 93, Staff Impl Aft allowing for efficiency gains, a larger Bank role in project, sector and ad- justinent lending would require some staff growth, Should the Bank de-. cide to play imore active catalytic investment, aid coordination, debt reduction and financial services roles, changes in skills mix and additions to the staff would also be needed. The number of additional staif would depend on decisions regarding the level of intensity devoted to the mobilization of non-Bank resources and the expansion of Bank tending. 94. As currently iinplementated, PHN and education operations int volve relatively high project preparation cost per dollar of lending, and thus would not be the preferred sectors if the objective were simply to maximize Bank leud- ing with a fixed administrative budget. PHN operations require over three times the average number of staff weeks of project. preparation per dollar of lending, and the corresponding figure for education nearly two times (see Appendix D). Less staff intensive approaches may be feasible and should be sought, and greater integration of population, health, nutrition and education, and with other Bank programs may also permit greater effici Bat thus far there is little evidence to suggest that concentration on these liuinan capital areas can be accomplished without substantial direct stalf in volvement. In addition, PHN, edu- 3cation and institutional development require an extensive knowledge of local conditions and prolonged in- volvement in the field. 95. An expansion of Bank operations in technology enpacity, in- stitution building, and environmental sustainability would inake it necessary to complement existing technical and economic skills and a change in the skill mix towards en- gineering sciences, technology policy, environmental sciences, public and private sector management, and political and social sciences. 96. In short, each of the areas highlighted for strategic choices is likely to require an increase in the quality and quantity of Bank staff, but which can be deployed flexibly to meet rapidly changing country and global needs, Savings and efficiencies are needed to assure that waste is minimized, but there will be no way to do the job required without un overall increase in Bank staff, comparable shifts from other activities, and/or savings gained by planned reallocation of functions with other international institutions. If we are not prepared to confront this prospect, then the nature of our strategic choices will be quite differ- ent aud much more constrained. 97. These trade-offs pose staff and management incentive issues in a sharp form. For example, are incentives strong enough to reward stall and managerial success in expanding the Bank's catalytic role in generating higher levels of re source transfers combined with Bank operations, rather than the quantity of the Bank's lending alone? Con- ileration might he given to separating —_staif-intensive, low lending-volume activities in some way from tlose where the emphasis is on financial transfers, te insure that they receive adequate attention. Special arrangements to lower their costs to borrowers might alsu be considered. 98. Relations With the Private Sector and Other Development Agencies. It is already clear that the Bank is now operating in a world in which other players in the development community are becoming more important or more powerful. In trying to broaden and deepen its relationship with the private sector internationally and within particular developing countries, the Bank faces some diffi cult choices of balance and empliasi Depending on the strategic directions chosen, the Bank could concentrate its private sector role on encouraging a tnarket-oriented environment, broadly as it does now. Or it could take a more activist aud direct stance vis-a-vis private sector entities, becoming actively involved ‘on a large scale (as in the catalytic investment role) in putting together investment packages with heavy private sector involvement. 99. An active role in aid coordi- nation and diplomacy demands a more systematic approach to collabo- ration with bilateral donors along the lines now being developed by the Africa region in the Special Program for Africa. A critical choice here is whether and how the Bank should make a special effort. to strengthen its relationship with Japan, which will certainly be the largest new source of concessional funding during the early 1990: This is particularly important as the growing Japanese program is highly skewed in its regional distribution and Japan does not have an infra- structure of staff and experience commensurate with its news The Dank should be able to play an important and constructive role in