IDA14 SupportingSmall and Vulnerable States InternationalDevelopmentAssociation December 2004 Table of Contents I. Introduction............................................................................................................................ 1 I1. Background............................................................................................................................. 1 I11 World Bank Activities in Small States . ................................................................................... 4 IV. Recipient-ExecutedActivities inSmall States....................................................................... 6 V. Optionsfor IncreasingSupport to SmallandVulnerable States............................................ 7 StrengtheningBank Activity ............................................................................................... 7 Options for RecipientActivities........................................................................................ 11 VI. Conclusions .......................................................................................................................... 12 Tables: Table 1: Small States' Share of Bank BudgetExpenditures ...................................................... 5 Table 2: Small States and LICUS ESW Outputs......................................................................... 6 Table 3: Small States FrequencyandAmount of Borrowingfrom IBRD/IDA .......................... 8 Table 4: Use of IDF by Small States and 7 Small LICUS States ................................................ 9 Table 5: Use of GEF by Small States, FY92-04.......................................................................... 9 Figures: Figure 1: Small States havenot yet benefitedfrom recovery of ODA ......................................... 3 Figure2: Trends inaidflows to small states ................................................................................ 3 Figure 3: World Bank Administrative Costs................................................................................. 5 Annex: Annex I: Small States: Status and Average Annual Aid Per Capita ............................................ 15 -11 .. - Abbreviations and Acronyms AAA Analyticaland Advisory Activities AIDS AcquiredImmuneDeficiency Syndrome BB Bank Budget CAS Country Assistance Strategy CEM Country EconomicMemorandum CFAA Country FinancialAccountability Assessment CPIA Country Policy and InstitutionalAssessment EAP East Asia andthe Pacific ESW Economicand Sector Work GEF GlobalEnvironmentFacility HIV Human ImmunodeficiencyVirus HR HumanResource IBRD InternationalBank for Reconstruction& Development IDA InternationalDevelopmentAssociation IDF InstitutionalDevelopmentFund IMF InternationalMonetaryFund LCR Latin America andthe Caribbean LICUS Low-IncomeCountriesUnder Stress MDTF Multi-DonorTrust Fund PER Public ExpenditureReview UN UnitedNations UNCTAD UnitedNationsConferenceon Trade and Development WB World Bank WTO World Trade Organisation SupportingSmall andVulnerableStates I. Introduction 1. At their October 2004 meeting, IDA Deputiesrequestedinformationon the adequacy and relevance o f Bank assistanceto small and vulnerable states, as these tend to have limited lending programs but at the same time needhigh-quality and extensive analytical advice and technical assistance. This note responds to that request by first reviewingissues inassisting small states (covering all small developing countries) and then focusing on a group of low-income, particularly vulnerable small states. The recommendations listed inthe final section provide some options for enhancing the level o f support offered to these states. 11. Background 2. SmallStates Ovewiew. Forty-five developing World Bank member states are "small,"' accounting for nearly one third o f the total number of developing countries. There are small states inevery geographic region, but most o f them fall into three main groups: Africa (14 countries), Caribbean (13 countries), and the Pacific (11countries). Together, the small states are home to 29 million people, 0.5 percent o f the total populationo f developing countries. Their sizes differ greatly, from the seven smallest "micro-states" with fewer than 100,000 people each (Antigua & Barbuda, Dominica, Kiribati, Marshall Islands, Palau, Seychelles, and St. Kitts and Nevis) to eight countries with more than 1.O million people (Botswana, Gabon, The Gambia, Guinea-Bissau, Jamaica, Mauritius, Swaziland, and Trinidad and Tobago). 3. A WideRange of DevelopmentStatus, The small states differ greatly not only intheir size, but also inper capita incomes, evenwithin the groups eligible to borrow from the World Bank, Annex Ilists the countries and their status vis-a-vis the Bank: Twenty small states are IDA-eligible, with per capita incomes ranging from less than US$600 inseveral African and Pacific countries (Comoros, The Gambia, Guinea-Bissau, Sao Tome and Principe, Solomon Islands, and Timor-Leste); to US$700-US$1,500 in suchcountries as Cape Verde, Guyana, Kiribati, Maldives, and Vanuatu; to more than US$3,300 infour blendborrowers (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines).2 All IDA-eligible small states are consideredvulnerable, and referredto inthis paper as small andvulnerable states. j The World Bank does not have a formal category o f small states. Among the World Bank's forty-five developing and transitionmember countries referred to above, forty-one have populationsof 1.5 million or less. In addition, Botswana, Jamaica, Lesotho, and Namibia participatedinthe work ofthe Small StatesTask Force in 1998-2000,althoughtheir populationsare above 1.5 million (see Small States: Meeting Challengesin the Global Economy, Commonwealth SecretariatiworldBank Joint Task Force report, April 2000, available at www.worldbank.org/smallstates). 2 Since 1985 IDA has accordedspecialtreatment to small islandeconomieswhich have per capita incomes above the IDA eligibility cut-off but have no or very limited creditworthiness, which limits or precludes access to IBRD borrowing;nine small island states currently haveaccess to IDA under the small island exception. - 2 - Eighteensmall states are IBRD-only borrowers, withper capita incomes ranging from just US$1,350 (Swaziland, near the IDA historicalthreshold) to more than US$7,000 in Palau, Seychelles, and Trinidad and Tobago). 0 Seven of the forty-five small states do not have Bank borrower status (Bahrain, The Bahamas, Barbados, Brunei, Cyprus, Qatar and Malta). Among the IDA-eligible states, six are low-income countries under stress (LICUS) - Le., countries that have weak policy and institutionalperformance. They consist of: Comoros The Gambia, Guinea-Bissau, Sao Tome and Principe, SolomonIslands, and Timor-Leste. Inaddition one ofthe IBRDcountries (Equatorial Guinea) is also classified as LICUS. This group of seven countries is referred to inthis note as the set of small LICUS states. 4. Common Characteristicsof Small States. Small states face a numberof well-known obstacles-because their economies tendto be undiversified and highly dependent on external trade, they are more vulnerable to economic shocks and have significantly more volatile growth rates than larger countries. Inaddition, the LICUS small states are characterized by fragility as a result of weaker governance, in several cases conflict, and (sometimes) a natural resource 6 6curse." Many small states, including the vulnerable ones, are also prone to natural disasters (such as tropical storms and rise insea level). Finally, the small LICUS states appear to face particular difficulties insustaining support from donors. 5. Official DevelopmentAssistanceFlows to Small States. Although small states as a group are well aided relative to their population size, the sub set of the most vulnerable (i-e., the smaIl LICUS states) experience more difficultly inmobilizing assistance. Compared to other developing countries, small states receive high levels o f aid inper capita terms (Annex I): on average, they received US$178 per capita annually in2001-02, compared to an average of U S 1 1 per capita received by low-income countries. The small LICUS states, however, received on average about US$107 per capita inthe same year. Official development assistanceto small states has fallen inrecent years - from a peak of US$2.5 billion in 1994to less than US$2.0 billion annually in 1998-2002. While overall aid flows have recovered since 1998, this recovery has bypassedthe small states (Figure 1). The decline has affected small states inall regions except Europe but it has beenmost pronounced and persistent inAfrica and the Caribbean (Figure 2). Again, comparing these figures with those of the small LICUS states one finds that the latter have sufferedan even greater decline: excluding Timor-Leste their total aid has fallen from US$581 million in 1991-92 to US$242 million in2001-2002.3 Inmost small states, the bulk ofaid is from bilateral donors, with multilateral donors playing a significantly smaller role than inlarger countries. Timor-Lesteonly startedreceivingaid in 2001-2002. - 3 - Figure 1: Small states have not yet benefited from recovery of ODA 3.0 70 2.8 65 2.6 60 2.4 55 2.2 50 2.0 45 1.8 40 1.6 35 1991 19921993 199419951996 199719981999 200020012002 Year Source: The World Bank based on OECD DAC data. Figure 2: Trends in aid flows to small states 1,40 \ 1,20 1,oo 800 0 E 600 .I te 400 f A =cn 6 Caribbean 200 L A A I 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 year Source: The WorldBank based on OECD DAC data - 4 - 6. Small States Task Force Report Agenda. In2000, the Development Committee as well as the CommonwealthHeads of Government welcomed the report of the Commonwealth Secretariat/World Bank Joint Task Force on Small States and its recognitionof the common characteristics o f small states and the challenges they pose to their economic and social development. The Task Force set out a focused agenda for: (i) tackling economic volatility, vulnerability, and natural disasters; (ii) strengthening public and private sector capacity; (iii) dealing with issues o f transition to the changing global trade regime; and (iv) examining new opportunities and threats from globalization. To help ensure that the agenda continues to receive adequate attention inthe international community, the World Bank committed to hosting a Small States Forum each year on the occasion of the World Bank Group/IMF Annual Meetings. The Forum provides an opportunity for representatives o f the 45 participant small states and six main partnerinstitutions -Commonwealth Secretariat, EuropeanUnion, IMF, UNCTAD, World Bank, and WTO -to exchange informationand ideas, assess progress on the Task Force report agenda, and set priorities for future work. Since 2000, the Bank has hosted four Forums and prepared annual progress reports on small-state related work programs at the six partner institutions mentioned above. In2004-05 efforts are underway to strengthen the participationof small states insetting the agendaand consulting on a regional basis to prepare for discussions at future forum^.^ 7. The following sections detail the levels of World Bank activity insmall states, as well as the extent to whichthese states are accessingresources from Bank-administered Trust Fundsand other sources o f finance. 111. World BankActivities in Small States 8. Bank Budget. While the World Bank's engagement insmall states has to be balanced withthe competing strong demand from larger countries, the former have slightly increasedtheir share of the Bank Budget inthe last four years. During FY00-04, total Bank Budget spending for small countries rose by 33 percent, while total Bank spending across all countries increased by 19percent. The corresponding AAA (whichincludes Economic and Sector Work and non- project technical assistance) amounts rose by 49 percent for the Bank as a whole, and by 64 percent for small states. The share o f total Bank budget allocations to small states i s between3 and 4 percent; a range that also applies to AAA spending (Table 1). By region, the share o f budget allocated to small states is highest inAfrica (around 6 percent); and lowest in `Other Regions' (East Europe, Middle East and North Africa and South Asia), at about 2 percent. It should also be noted that, measured interms o f administrative costs per capita, small states have fared muchbetter than their larger counterparts (Figure 3) .' 4 More information about the Forum as well as the Small States Task Force Report agenda is available at www.worldbank.orrr/smalIstates. The list o f countries included as small states in Tables 1 and 2 and Figure 3 is for countries that have populations o f 1.5 million or less and where the Bank is engaged in some operations. - 5 - 9. Compared to the small states as a whole, the seven small LICUS states fared slightly less well, although they also saw an increase inspending: over the period FY00-04,Bank budget expendituresto them increased by 25 percent and expenditure on AAA went upby 21 percent. Table 1: Small States' Share of Bank BudgetExpenditures("/o) FY00 FYOl FY02 FY03 FY04 Africa Total 6.7 7.7 7.1 7.0 6.8 Ofwhich AAA 4.2 5.8 4.2 5.4 6.0 LCR Total 4.7 5.5 4.7 4.5 4.4 Ofwhich AAA 2.3 2.5 5.1 4.4 4.7 EAP Total 4.2 5.5 4.7 4.5 4.4 Ofwhich AAA 7.0 6.8 6.3 5.0 5.2 Other Total 1.8 1.5 1.7 1.8 2.1 Regions Ofwhich AAA 2.5 1.3 1.0 1.4 1.3 AI1 Regions Total 3.9 4.3 4.3 4.1 4.1 Ofwhich AAA 3.5 3.6 3.5 3.5 3.9 Note: 'Total' includes AAA, plus expenditures related to lending and project supervision. In each case the figure given is as a percentageofthe same category for the regionconcerned. Source: The WorldBank T Figure 3: World Bank Administrative Costs 1.8 1.6 1.4 2n 1.2 3 1 8 0.8 L Y, v) 0.6 3 0.4 0.2 0 2002 003 2004 Fiscal year 1 7 Small LICUS states allsmall states 0 9 2 medium countries (pop 1 8-50 million) 017 large countries (pop > 50 million) Source: The World Bank 10. Economic and Sector Work. An analysis o f ESW for small states interms o f outputs shows that ESW products increased in number from 14 inFYOl to 23 inFY04 (all small states), and from 1 inFYOl to 4 in FY04 (small LICUS states). Increased emphasis on analytical work inLICUS shows through the increased level of core diagnostics per country inLICUS compared - 6 - to small states as a whole, despite poor data availability and insecurity inmany small and vulnerable states. Nevertheless the number o f core diagnostic products completed inthe past 5 years inboth small states and small LICUS states remain below the average for IDA and IBRD countries (Table 2). Table 2: Small States and LICUS ESW Outputs # ESW # ESW # ESW # ESW Core Average core products products products products diagnostics diagnostics per FY 01 FY 02 FY 03 FY 04 (last 5 yrs)6 country Small States 14 13 28 23 29 1.0 Small LICUS States 1 3 6 4 10 1.4 All LICUS States 83 2.5 All IBRDDDA 386 2.7 Source: The World Bank. 11. Human Resources: Data on Bank field staff show that staffing levels for small states have increased inrecent years, from a total o f 13 staff in2000, to 29 in2004: an increase from 0.5 percent to 1.1 percent o f total Bank staff. States covered include Gabon, The Gambia, Guinea-Bissau, Guyana, St. Lucia and Timor-Leste. Timor-Leste (2000), The Gambia (2003), and Guinea Bissau (2002) have had staff located there since 2000; inaddition staffing levels have increased inthe Sydney office, which oversees the Pacific Islands. Despite the upward trend, however, most small states do not have country offices and are unlikelyto warrant them based on the size o f current programs. Aside from field staffing levels, a further issue affecting small LICUS states i s the relative unattractiveness o f working inthem, compared to the better performingcountries. As was identifiedinthe LICUS Task Force report, weak performing states are challenging environments to work inand require highlevels o f energy and particular skills in dealing with difficult political environments. The Bank has respondedto this by increasing staff incentives to work indifficult countries (see para. 15 below). IV. Recipient-Executed Activities in Small States 12. IDA creditdgrantsand IBRD loans. Inrecent years, only nine small states have been frequent recipients o f IDA credits/loans or IBRDloans, 16 have beenoccasional recipients, and 14 have not beenactive recipients duringthe last five years (Table 3).7 Six o f the seven small LICUS states have received occasional financial assistance from IDA/TBRD. The number o f active projects for these seven countries ranged from zero (Equatorial Guinea) to more than eight Data from "Improving the Bank's Analytics and Advisory Services" (OM2004-0047/1), OPCS, Progress report, October 27, 2004. 7 Notwithstandingthat World Bank lendingto most small states comprisesonly a few projectsper decade, the administrativecosts of the World Bank project portfolio in small states - spendingon lending(preparationand appraisal) and project supervision- have ranged between4.3 percent and 4.7 percent ofthe Bank-widetotal in the last three years. Within two o fthe three most affected Regions, this share is even larger: 7.1-8.5 percent in the Africa Regionand 5.5-7.7 percent inthe Latin America and the CaribbeanRegion. Inthe EastAsia and Pacific Region, where most small statesare inactiveor only occasionalborrowers, about 4 percent o f spending on lendingand supervision is in such states. - 7 - inTimor-Lesteat the end ofFY04. Interms ofnet commitment values, the portfolios ofthese small LICUS states range from US$13million (Comoros) up to a maximum of US$99.5 million (The Gambia). 13. Other activities. For the majority of small states, financing assistance from the World Bank is mainly from sources other than regular lending operations (i-e., IBRDIIDA). For example, they have received substantial assistance inthe form of grants from the Global EnvironmentalFacility (GEF), totaling US$86 million for 23 World-Bank Group-implemented projects, though only The Gambia from the subset of small LICUS states currently receives GEF finance. The InstitutionalDevelopmentFund(IDF) has also beenan important source of grants: 11 percent o f both number of projects and commitment amount have beento small states, All of the seven small LICUS states have utilized the IDF. InSao Tome and Principe's case, there were ten separate IDF grants. The total amount o f grants approved for this group of countries from the IDF since 1993 i s US$6.18 million. Tables 4 and 5 compare the number and amount o f grants to the LICUS small states group with those to small states overall by region. and global totals, for these two facilities. The LICUS Trust Fund exists to provide small levels o f grant finance to LICUS countries innon-accrual (and to active countries inexceptional circumstances) to support basic reform, improved governance and service delivery (especially HIV/AIDS) during periods o f transition inLICUS which otherwise have no sources of Bank finance to utilize. Of the small LICUS states, only Comoros has utilized the LICUS Trust Fund to date, though Guinea Bissau i s also currently eligible. Country-specific,multi-donortrust funds have also beenusedinsmall states for capacity building projects with costly technical assistance components. For instance, in Timor-Leste, the Bank i s preparing a Planning and FinancialManagement Capacity Building Program, the cost o f which i s currently estimated at US$ 30 million for five years. For this, the Bank is leveraging co-financing from several bilateral donors. V. Optionsfor IncreasingSupport to Smalland Vulnerable States StrengtheningBankActivity 14. Increasing tailored ESWfor small LICUS states. The data above show that, though the provision o f ESW for small states and small LICUS states has increased, a gap remains vis-a-vis other countries. Inreducingthe gap further, the 2004 AAA progress report recommends that providing more tailored products i s appropriate inmost cases. Specifically, four options for strengthening the Bank's AAA work inthese countries are suggested: Undertake selective, targeted Bank knowledge activities where there i s effective demand for Bank involvement;8 this will be the approach proposed, for example, inthe upcoming CAS for the Pacific Member Countries. Quick-response policy notes to address specific 8 For example,there were four studies on the financial sector, investment climate, infrastructure, and a CFAA in Bhutan duringFY02-04. There were 6 studies in Timor-Lesteduring FYO1-04, includinga CEM, PER, CFAA, Country ProcurementReview, Education Sector Reviewand Poverty Assessment. Other countries covered include Barbados, Cape Verde, Dominica,Djibouti, Estonia, Gambia, Grenada, Jamaica, Lesotho and Maldives and St. Kitts. - 8 - concerns of the small states may be a useful way o f utilizing scarce Bank administrative resources. Table 3: Small StatesFrequencyand Amount of Borrowingfrom IBRD/IDA Number o foperations approved Amount approved FY05 Last 5 years Previous5 years Last I O years Eligibility (FY00-04) (FY95-99) ($ Million, FY95-04) 9 Frequent Borrowers ('3 operations last 5 years) Bhutan IDA 4 72.9 Cape Verde IDA 7 153.0 Djibouti IDA 7 97.0 Grenada IDA&IBRD 4 35.6 Guyana IDA 4 86.6 Jamaica IBRD 7 432.7 Lesotho IDA 4 173.6 Samoa IDA 4 41.2 St. Lucia IDA & IBRD 5 43.3 16 OccasionalBorrowers (1-3 operations last 5 years) Barbados IBRD* 1 0 15.2 Belize IBRD 2 2 32.9 Comoros IDA 3 4 59.2 Dominica IDA&IBRD 2 1 12.3 Estonia IBRD 1 4 70.3 Gambia, The IDA 3 3 99.0 Guinea-Bissau IDA 3 3 106.0 Maldives IDA 1 1 31.0 Mauritius IBRD 3 3 105.5 Sao Tome and Principe IDA 3 0 16.5 SolomonIslands IDA 1 1 16.0 St. Kitts&Nevis IBRD 3 1 33.0 St. Vincent & the Grenadines IDA&IBRD 3 0 15.3 Timor-Lesteg IDA 1 0 4.0 Tonga IDA 2 0 16.8 Trinidadand Tobago IBRD 1 4 117.1 14 Inactive Borrowers (no operations last 5 years) Kiribati, Vanuatu IDA Antigua& Barbuda, Botswana, Equat.Guinea, Fiji, Gabon IBRD 4 49.2 MarshallIslands,Micronesia, Namibia, Palau, Seychelles, Suriname, and Swaziland RegionalBorrowers: OECS Countriesicaribbean IDA&IBRD I 2 26.5 Total small states operations 80 64 1961.7 * = Exceptional access/eligibilitpas Barbados is currently not a borrower; an additional6 small states are also not borrowers (Bahamas, Bahrain,Brunei, Cyprus, Malta, and Qatar). Source: The World Bank. Does not include Trust Fund for Timor (TFET) operations. - 9 - Tables 4: Use of IDF by Small States and 7 Small LICUS States FY93-96 FY97-00 FY01-04 Total Africa small states Number of grants 23 16 12 51 Amount (US$thousand) 5,198 3,798 3,983 12,979 Asia small states Number of grants 4 4 13 21 Amount (US$thousand) 620 961 3,516 5,097 Latin America & Caribbean small states Number o f grants 9 4 2 15 Amount (US$thousand) 1,627 515 550 2,692 Total small states (all Regions) Number of grants 38 27 27 92 Amount (US$thousand) 7,84 1 5,948 8,050 21,838 Of which 7 small LICUS states Number o f grants 7 10 12 29 Amount (US$thousand) 1,101 2,345 2,741 6,186 Total All Countries Number of grants 313 311 290 914 Amount (US$thousand) 82,823 92,098 93,712 268,633 Source: The World Bank Table 5: Use of GEF by Small States, FY92-04 World Bank Group-Implemented GEF Projects Country Amount (US$million) Number o f projects Belize 1.6 2 Bhutan 10.0 1 Cape Verde 4.7 1 Gambia 1.o 1 Grenada 0.7 1 Jamaica 3.8 1 Lesotho 7.3 1 Mauritius 5.3 3 Namibia 7.1 1 Samoa 0.9 1 Seychelles 3.8 3 Regional/multi-country projects Caribbean 16.7 3 OECS Countries 16.2 2 Western Indian Ocean Islands 3.9 2 Total small states 83.0 23 Total all countries 1,776.7 244 Share o f small states 4.7% 8.3% Source: The World Bank - 10- Use a regional approach where appropriate. To some extent this i s already being done; in recent years the Bank carried out five regional studies for the Caribbean small states and three regional studies for the Pacific small states." Support regular consultation on a review o f public expenditures (PER) with the IMF, to tackle fundamental public financial management weaknesses. Ensurethat central departments, especially DEC, are doing researchthat is relevant to small and vulnerable states and that small states are not marginalized inthe preparation and dissemination o f institutional "flagship" products, such as the World Development Report. This would imply making available resources to cover variable costs associated with additionalresearchon these countries. Strengthen the existing knowledge network on small countries for staffto share innovative ideas, approaches andbest practices. 15. Human resourcestrategies: Another set of options relate to staff working on small vulnerable states. An objective here could be to strengthen the capacity o f regional Bank offices serving these countries, along with enhancing incentives for talented Bank staffto take up assignments. The specific options are: i) Changes introduced under the LICUS initiative to HR policies and incentives could also be applied to small and vulnerable states that are not part of the LICUS Group. These changes include creation of a `Global Mobility Center' to support spouses and families, and more targeted retention tools such as the scarce skills premiumand a recruitment bonus. ii) Inaddition, hardship allowances are now applied to environments considered risky and this i s also applicable to small and vulnerable states. At presentan extra premium is already being appliedto LICUS. iii) Anotheroptionthatiscurrentlybeingdiscussedisjobdesign,i.e., combining assignments in smaller countries with other activities, such as attractive research opportunities and multi-country work. Some o f these proposed staffing strategies may require increases in administrative budget and/or shifting of administrative resources away from larger countries. 16. Increasing IDAfunding to small states: The formula for allocating IDA resources has a `fixed' component, which favors small states by allocating a lump sum amount to each country lo Examples include: Caribbean Youth Development: Issues and Policy Direction. 2003. It covers education, healthand employment issues in the Organizationof Eastern CaribbeanStates: Belize, Dominican Republic, Guyana, Haiti, Jamaica, Suriname, and Trinidad and Tobago. A Comparative Study of Coastal Resource Management in the PaciJic Islands, 2000. It covers environmentalissues in communities in Fiji, Palau, Samoa, SolomonIslandsand Tonga. Natural Hazard Risk management in the Caribbean: Revisiting the Challenge. 2002, covers 12 small Caribbean states: Antigua & Barbuda, Bahamas, Barbados, Cuba, Dominica, Dominican Republic, Grenada, Haiti, Jamaica, St. Kitts, St. Lucia and US Virgin Islands. Caribbean Economic Overview 2002: Macroeconomic Vulnerability, Household Vulnerability and Institutional and Policy Responses. - 11 - irrespectiveof its CPIA performanceassessment. By providinga fixed element of SDR 3 millionto all countries, irrespectiveof populationor performance, small countriesare guaranteed a minimum allocationconsiderably greater than they would receive ifthe entire allocationwere basedon populationand performanceratings.' This figure of SDR 3 million, however, was ' fixed at the beginningof IDA10 (FY94-96)and has not changedsince then. At the same time, IDA replenishmentshave increasedby about 10percent inSDR terms betweenIDA10 and IDA13. Managementtherefore recommends an increase inthis fixed component of allocation to reflect that - Le., to raisethe minimumfrom 3 millionto 3.3 million SDR inIDA14. With 81 countries, the implicationis that an additionalSDR 24.3 million would be allocatedoutside the performance based system. Options for Recipient-ExecutedActivities 17. While small states as a group are well aided relativeto their populationsize, it is clear that the subset of weaker small states has more difficulty leveragingsustainedlevels of support and interest. Increasingaccess ofthese states to existingandnew instrumentsavailable within the Bank to support capacity buildingandtechnicalassistance i s one potentialapproachto tacklingthis handicap. The following specific possibilitiescouldbe considered: i) The LICUS Trust Fundwas establishedinFY04 with a budget of US$25 million, of which US$20 millionhas already beencommitted. It has a very clear focus on supportingcountries innon-accrualto make progressthrough fragile transitionprocesses with targetedgrants to support governanceand social service delivery activities defined inthe Bank's country assistance strategy. Only inexceptionalcircumstancescan grants be awardedto active countries (e.g., Comoros), where IDA and other resources cannot be accessed. Underthe secondreplenishmentof the LICUS Trust Fund(likely end FY05), considerationcouldbe givento expanding eligibility for the LICUS Trust Fundto include small LICUS states that are not innon-accrual&e., that have active IDA programs). This is nowpossibleonly inexceptional circumstances. The advantageof this approachis that the needs ofthe small and vulnerable states inquestionare similar in many ways to LICUS non-accrualcountries for which the Trust Fundwas designed. In additionprocedures are already inplace for the management ofthe Trust Fundso that assistance couldbe deliveredreadily. Ifimplemented,there would likely be an impact on the volume neededat the nextrequest for a replenishmentof the LICUS Trust Fundfrom surplus. ii) Smallstates ingeneralmakegooduse ofsmallgrantsfromthe Institutional DevelopmentFund,which was establishedin 1992to finance quick, action-oriented upstreamcapacity buildingactivities. A prominent role of the IDF insmall states is appropriate, bothbecause a typical IDF operationis small (andhence adaptedto limited size and scope of operations in most small states) and becausesmall states often have access to bilateralgrants for much of their development programsand thus are unlikely to obtainIDA or IBRD projects which couldbringthem the benefit of the Bank's technical assistance basedon global knowledge. This gap i s most acute inthe LICUS small states. " For details ofhow the allocation works see "Additions to I D A Resources: Thirteenth Replenishment," Annex 1. - 12- To enhance small andvulnerable states access to finance for essential capacity building, further special provisioncouldbe made for small vulnerable states under the IDF, to increasevolumes of assistance ofthis type. As describedabove, the IDF has a track recordof experience and results, includinginseveral of the smallvulnerable states. Bank executionof IDFmay be consideredinthe case of small andvulnerable states that have capacity problemsinmanagingthe fund. iii) Otherproposedinstrumentsto supportcapacitybuildingactivitiescouldmakespecial provisions for small andvulnerable statesthat urgently needcapacity buildingassistance. One optionwould be to explore the possibility of creating a `window' for small and vulnerable states inthe (proposed)Multi-donorTrust Fund for Capacity Building (MDTF) to be launchedinthe early pal?of 2005. Some donors, suchas the Netherlands, Canada, the Nordic states and Germany, have expressedinterest inthe Fund, which could strengthen a number of existingfacilities that support capacity buildingto small states within the Bank. The World Bank Institutehas providedassistance to small states through regionalAAA programs, such as training, capacity building, advisory work, leadershipworkshops and strengtheningo f specific national institutions. The Caribbean DistanceLearningNetwork funded by Canadaand DFID is an example of such a regionalprogram. There is potentialto havea component ofthe MDTF designatedto focus on capacity buildingfor small andvulnerable states but three concerns needto be addressed. First is to ensure that funding for the small states component of the MDTF i s additionalto the currentlyproposedenvelopeand does not crowd out existingTrust Funds. Second, allowing funds from the small states window to augment AAA budgets and cover World Bank staff costs12would helpto address the incentive problemof attractingskilledBank staffto work inthese states. This possibility needsto be explored. Third it is important to ensure that the capacity buildingfor a small and vulnerable country is done ina way that is consistent with the CAS. iv) For those small and fragile stateswhere the countries and donors are coalescing around sharedobjectives and strategies, another option is to establishcountry-specific,multi donor trust funds to be funded by bilateralpartners,which covers AAA. An example is Timor-Leste,where some key AAA outputs (e.g.,Poverty Assessment, EducationSector Review, DoingBusiness) have beenco-financedby other donors. V) Since the LICUS Trust Fundfaces competingdemand from larger countries and IDF amounts are very small, another possibilityis to scale up the existinguntiedbilateral Trust Fundsby increasingthe amount ofresourcesandby coveringBank staffcosts. VI. Conclusions 18. O f the 45 World Bank member states that are consideredsmall, 20 are IDA-eligible, with per capita incomes rangingfrom less thanUS$600 to more thanUS$3,300 for four blend countries; 18 are IBRD-onlyborrowers, andthe rest are non-Bankborrowers. Among the small l 2 Some trust funds - Belgian Trust Fund, the Australian Pacific Facility, and the DFID AAA Trust Fundfor India -allowforthecoverageofvariablecostsoftheBankstaff. - 13 - states, sevenare classifiedas LICUS, characterizedby weak governanceand conflict. Hence small states spana wide range of living standards, but all face commonproblems of lack of diversificationand vulnerabilityto shocks. Inaddition, a number are proneto naturaldisasters. The paper focused on the 20 IDA-eligiblecountries as small and vulnerable states. 19. Donor supportto small states has beendeclining, from a peak ofUS$2.5 billion in 1994 to less than US$2 billion a year in 1998-2002. The decline has beenmostpronouncedand persistent inthe small states of Africa andthe Caribbean. Inspite ofthis fall indonor resources, small states still receiveper capita aidthat is morethan sixteentimes higher than low-income countriesas a group. Furthermore, the donor community has begunto look more closely at how best such states can be helpedinaddressingtheir specific problems. In2000 the Commonwealth Secretariat/WorldBank Joint Task Force set out an agenda for tackling these problemsthrough a common donor framework with small states. 20. For its partthe Bank has increasedits support to small statesthroughAAA, for instance inthe number ofpieces ofESW carriedout. Since FYOO it has also substantially increasedthe budget allocationfor AAA to small states by 64 percent andthe total budgetto such states by 33 percent. Evenwith these increases,however,the number ofpieces ofESW per country is less thanthe average for all Bank countries. The small states' share inBank-wideAAA budgethas also increasedslightly duringthis period. Although these increases inAAA support are warranted, the Bank does face strong competingdemandfor its limitedresources from the larger countries, where demandshave also beenincreasing. The challenges for the future are to improve further AAA products, to enhance their impact and efficiencyandto mobilize more donor resourcesto finance IDA support to these states. 21. Along with the strong increase inAAA support interms ofthe budget amount, there has beenan increase inallocationof humanresources:staffnumbershave increased,includinga greater levelof fieldpresence, either inthe countriesthemselves or inregionaloffices that serve these countries. More can and i s beingdone to encourageBank staffto work on small states. 22. Interms oflending,the Bank's roleinsmall statesremainsmodest, with only sevenof the twenty IDA-eligible countries beingfrequent borrowers over the last five years. Annual approvedamounts are also small: ofthe order of US$7-8 millionper country per year for frequent borrowers. The administrativecosts of such small operations relative to the volume of lending,are, of course, correspondingly high. Scaling up lendingor AAA for small and fragile states, especiallyby usingBank staff, will result inhigher Bank administrativebudget. 23. Inthe light ofthe problemsthat havebeenidentifiedabove, the following actions in support of small andvulnerable states are proposedfor consideration: a) Modify the funding allocationformula, so that the lump sum component is increased from SDR 3 million to SDR 3.3 million for the 14thIDA replenishment. This will benefit each small state by almost the full value of the increase, while the impact on larger states will range from small to negligible. - 14- b) Undertakeselective, targetedand flexible knowledge activities inthese countries,making greater use of quick-responsepolicynotes and increasedregionalapproacheswhere appropriate. It is also importantto carry out fiduciary ESW where there is a demandby the country for policy lendingandto facilitate transitionto the use of country systems, which would have a highpay-offinspeeding harmonizationand reducingthe burdenthat donor proceduresput on the very weak capacity o f small states. All this will require additionalresources, especially for stafftravel to remote places, which couldbe met out of trust funds that permit suchexpenditures(see (d) below). c) Providemore incentives for staffto work on small states, includingrevisedpromotion criteriaandhardshipallowances. d) Enablethe LICUS Trust Fund,the InstitutionalDevelopmentFund, the proposedMulti- donor Trust Fundfor Capacity Building, and other Trust Fundsto finance costs relatedto capacity buildingfor small andvulnerable states, where appropriate. Explore possibilitiesfor setting up country-specifictrust funds where appropriate. -1.5- Annex I Small States: Status andAnnualAid Per Capita (Current US$) Status 1991-92 1996-97 2001-2002 Africa Botswana IBRD 91 63 20 Cape Verde IDA 318 287 187 Comoros IDA 125 65 52 Djibouti IDA 213 150 99 EquatorialGuinea IBRD 170 66 34 Gabon IBRD 107 72 31 Gambia, The IDA 107 33 42 Guinea-Bissau IDA 104 123 42 Lesotho IDA 85 58 37 Mauritius IBRD 53 27 19 Namibia IBRD 109 104 62 Sao Tome and Principe IDA 449 296 211 Seychelles IBRD 295 235 131 Swaziland IBRD 68 33 25 Africa Small StatesAverage I64 I15 71 Asia and Pacific Bahrain NB 107 143 64 Brunei NB 17 6 -2 Bhutan IDA 94 88 80 Fiji IBRD 73 59 37 MicronesiaFed. Sts., IBRD 71 95 1031 Kiribati IDA 312 173 177 Maldives IDA 155 115 92 MarshallIslands IBRD 85 1374 1287 Palau IBRD 0 2817 1636 Qatar NB 3 3 3 Solomon Islands IDA 123 111 98 Timor-Leste IDA 0 0 270 Tonga IDA 224 306 211 Vanuatu IDA 301 166 145 Samoa IDA 329 180 23 1 Asia Small States Average 146 463 357 Latin America and Caribbean Antigua & Barbuda IBRD 94 118 148 Bahamas,The NB 11 9 22 Barbados NB 5 17 4 Belize IBRD 122 82 88 Dominica IDA 212 396 350 Grenada IDA 158 107 102 Guyana IDA 150 272 106 Jamaica IBRD 58 26 15 St. Kittsand Nevis IBRD 186 172 42 1 S t Lucia IDAABRD 185 217 157 St. Vincent and Grenadines IDA/IBRD 157 144 62 Suriname IBRD 153 225 40 Trinidad and Tobago IBRD 2 20 -3 Caribbean Small States Ave. 11s 139 116 Europe Cyprus NB 48 44 65 Estonia IBRD 39 45 50 Malta NB 37 124 16 Europe Small States Ave. 41 71 44 All Small States Averape 135 230 178 NB: Non-borrower Source: The World Bank and OECD Data