Statement by Jean-Claude Milleron at the meeting of February 29, 2000

87724 International Bank for Reconstruction and Development International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS2000-19 February 28, 2000 05:41:46 PM Statement by Jean-Claude Milleron Date of Meeting: February 29, 2000 CAMBODIA - Country Assistance Strategy and Structural Adjustment Credit Cambodia is one of the poorest countries in the world. It lacks most of the essentials of development : sound and reliable institutions, basic infrastructure, human capital... Moreover, as hundreds of donors tend to crowd each other out and overwhelm the already strained capacity of the government, in Cambodia more than anywhere else, what matters the most is not how much assistance we are going to provide, but how we are going to deploy it. In this respect, the CAS and the SAC we are discussing today deserve to be commended, on a number of grounds. First of all, both of them provide a very candid assessment of the terrible situation witnessed on the field, regarding governance and standards of living in particular. This candor, as well as the willingness of the authorities to allow the translation and publication of these documents in Cambodia, are an indication that both IDA and the authorities are fully aware of the magnitude of the challenges they face and are determined to confront them. Second, beyond the mere description of facts, both the CAS and SAC also provide some very insightful analysis of the roots of Cambodia’s problems and pave the way for implementing corrective actions. Much of this can certainly be accounted for by the extensive consultation process in which Staff engaged while preparing this CAS, which demonstrates the usefulness of this pioneering approach. Third, I really appreciated the presentation of these documents, which are both well written and structured, very clear and also quite transparent as far as the underlying conditionality is concerned. Having said that, I would like to make the following comments. On SWAPs and selectivity I found the concept of sector wide approaches (SWAPs) very thoughtful and well-suited. Obviously, in a country with so many donors involved and such a weak administrative capacity, it is of the essence to achieve some more ambitious form of donor coordination. Nevertheless, there is a clear risk that valuable time and resources get consumed by this process instead of directly addressing development needs. There is also a risk that, as donors struggle to coordinate, the provision of assistance gets delayed. This would result in a sudden drop in aid flows which would be far more detrimental to Cambodia than continued confusion and overlaps within the donor community. In other words, I think the SWAPs rewards would be high, therefore, they should be given a chance. Nevertheless, IDA should be prepared to go ahead with its assistance program if the conditions to do so are fulfilled, even if the SWAP process falls through or gets stalled. As regards the sectoral involvement of IDA, I feel that, once again, selectivity is not being taken seriously. I also fear there might be some consistency issues in the CAS. The Staff attempt to justify IDA’s involvement in many sectors by putting forward Cambodia’s "enormous needs". True, but Cambodia also gets enormous support from the donor community. So, here too one could argue that the Bank is likely to be more efficient if it is focused, which of course would not prevent it from participating in policy and strategy discussions with other donors, at the government’s request. Also, to prevent IDA from getting durably locked in a large array of sectors as a result of its sponsoring the SWAPs, we expect the Board to be provided with a clear phase out scheme after the CG meeting. Furthermore, if IDA decided to limit somewhat its presence in sectors where it lacks a comparative advantage, it would be able to dedicate more resources to areas which are crucial for future development, namely governance and agriculture. As far as governance is concerned, I very much appreciate the design of the SAC, which is very much focused on governance related issues, but the magnitude of the problem is such that I cannot help thinking more should have been done. In particular, IDA should take the lead in the governance SWAP, as its neutrality is an obvious advantage over other donors, as well as the tools we are currently strengthening. As regards agriculture, I must confess I am a bit puzzled : on the one hand, we read in the CAS summary that rural development is only a moderate priority (which, by the way, is at odds with the conclusions of the recent country assistance evaluation by OED), that no SWAP is envisaged in the immediate future and that IDA itself won’t have a rural development strategy until 2002, with no rural development loan until 2003. On the other hand, if the names of the projects shown in the proposed base-case lending program are not deceiving, close to 41 % of IDA funds will go to projects related to rural development. Staff’s comments on this apparent inconsistency would be welcome. On risk management The triggers governing relations between lending scenarios, are well-conceived. Nevertheless, the analysis of the risks faced by program implementation draws such an appalling picture that these triggers do not fully tackle the issue of risk management. In particular, they fail to include specific provisions for monitoring the use of IDA funds, and more generally to concretely improve the situation on the ground. In addition, it would be interesting to know which operations would be cut in priority, should developments force a move to the low-case scenario. I was also wondering if the triggers listed in the CAS for moving to the low-case and high-case programs were additional or alternative. The wording of the report seems to suggest these conditions must be met simultaneously to trigger a change of scenario, but I would appreciate it if Staff could confirm that. On private sector development Last, but not least on the CAS, I could not help but note that we were still short of a true strategy for private sector development. Table 4 : "CAS at a glance" tells it all : where IDA has developed a full-fledged, thoughtful strategy, IFC and MIGA only show a conceptual vacuum, filled with the words "demand driven". If we are not able to conceive a private sector development strategy in a country like Cambodia, one may really wonder how we are ever going to cope with complex emerging market economies. On the design of the SAC This SAC is a timely and very well-designed operation. But, in addition to the lack of provisions allowing to effectively mitigate the risks created by the huge governance problems, which I already mentioned, I have two concerns. First, I fear the revenue side of the program relies exceedingly on legal improvements, whereas the diagnosis suggests that the most serious shortcomings reside in the limited implementation capacity of public administration. Arguably, it would be pointless to improve the legal framework if the means to enforce it are missing. Secondly, I do not know what weight one should give to the fact that the section on expenditure comes after the sections on revenues in the presentation of the loan, but, to me, it would be a major mistake to improve revenue collection without having, first, put expenditure management in order. Otherwise, any improvement in revenues is likely to be wasted. Finally, it would like to raise a more general question. It is mentioned in the CAS that there income inequalities have increased in the recent past, which could partly offset poverty reduction efforts if this trend were not reversed or stopped. Since one purpose of the SAC is to help the authorities design a new public revenue system, I would appreciate to hear Staff’s views on how the problem of rising inequality might be addressed in this context, as well what the authorities’ views are on this politically sensitive issue. In closing, I would like to reaffirm my support to this CAS and this SAC, and to wish the authorities success in confronting the many challenges that await them. My best wishes also go to Mrs. Okonjo-Iweala in her new assignment. She will be a considerable loss for the Bank, where she has done a very fine job and hopefully will come back to after this new experience.