The economic and social transformation of the Asian-Pacific region in recent decades has been dramatic. Why has progress and the scope for progress nonetheless remained limited in some countries? How can this be remedied?This Asian Development Bank (ADB) discussion paper is concerned with weakly-performing developing member countries. Weak performance in these countries has led to hardships for large sections of their populations, and negative implications for neighbouring countries. Addressing their performance is likely to benefit the region as whole.
For analytic and illustrative purposes, weak performance is measured by per-capita incomes, growth rates of per-capita incomes, and quintile rankings of ADB’s Country Performance Ratings (CPRs). This last primarily assesses the policy and institutional framework. A country is defined as weak if it has experienced low growth relative to income level and has a weak CPR, or it has a CPR in the weakest category. Since governments lack capacities and/or commitment to reform, aid conditionality is unlikely to be effective.
Three factors underlie weak performance in states undergoing economic transition: Weak management capacity, small isolated market conditions and civil conflict among important social groups. Effective assistance can be built on two key foundations: Detailed country-specific analytical work and strategic partnerships with other donors.
- All weakly-performing countries lack capacity to formulate good consistent policies, implement them and evaluate results. This may be worsened by corruption, or leadership catering to a narrow group.
- Small island economies or landlocked nations are frequently unable to exploit economies of scale and comparative advantage, due to small-scale production and high transport costs.
- Countries marked by conflict or post-conflict face adverse consequences including the weakening of social institutions on which governance is founded.
- Donor partnerships have special relevance in assisting weakly-performing states, to prevent stretching already weak capacities. Problems of misgovernance and conflict also involve political factors in which ADB has little direct role to play.
- Capacity-building is likely to be the main component of operations. This warrants careful design since aid has often provided capacity substitution instead, via consultants. A participatory approach must be incorporated and fostered.
- Projects vital to generating economic growth and providing social services are needed as a ‘development dividend’ to ensure key stakeholders buy into donors’ efforts.
The following implications are drawn for ADB, and donor guidance is requested:
- A key step will be to adopt criteria for identifying weakly-performing member developing countries. Those mentioned above may be used.
- Some weak performers may be in arrears for ADB loans. It is important to decide whether resultant sanctions should be applicable also to ADF grants. Countries are likely to be in pressing need of grants but money is fungible and may be used to clear the arrears, creating moral hazard.
- ADB can provide useful expertise to partners to help leverage their funds, or co-finance projects if grant finance is available. Ensuring a development dividend that may require investment is necessary for key stakeholders to buy into reform.
- Special attention will need to be paid to ADB staff incentives and skills. Modest lending should not damage staff performance evaluation and work in complex and problematic country circumstances should be recognised.
- A likely expansion in the use of non-lending products will increase the need for technical assistance resources. Additional loan and grant resources may be needed to fund projects for the ‘development dividend’. Further resources and quick disbursements are required for emergency assistance.
