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Essay on the International Development Association (IDA)
Essay Contents:
- Essay on the Objectives of IDA
- Essay on the Membership and Organisation of IDA
- Essay on the Capital Structure of IDA
- Essay on the Criteria for IDA Assistance
- Essay on the World Bank and the IDA
- Essay on the IDA and Less Developed Countries
- Essay on the IDA and India
Essay # 1. Objectives of IDA:
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The International Development Association (IDA) was established on 8th November 1960 as an affiliate and complementary institution of the World Bank. The idea to establish this institution was to provide loans to the less developed countries on more liberal or concessional terms than those applied by the World Bank. For this reason, IDA is sometimes referred as the “Soft Loan Window” of the World Bank.
The principal objectives of the IDA are as follows:
(i) Provision of financial assistance to the less developed member countries on easy terms.
(ii) Promotion of economic development, increase in productivity and consequent improvement in the living standards in the less developed areas of the world.
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The Articles of Agreement related to IDA sum up the aims and objectives of this institution in these words, “…to promote economic development, increase productivity and thus raise standard of living in the less developed areas of the world included within the Associations’ membership, in particular by providing finance to meet their important development requirements on terms which are more flexible and bear less heavily on the balance of payments than those of conventional loans, thereby furthering the development objectives of International Bank for Reconstruction and Development and supplementing its activities”.
The IDA assistance is concentrated upon the very poor countries primarily those with a per capita GNP of less than 520 dollars at 1975 prices.
Essay # 2. Membership and Organisation of IDA:
Membership:
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All the member countries of the World Bank are eligible to become the member of the IDA, provided they are ready to subscribe to the IDA at the rate of 5 percent of their existing World Bank share capital subscription quota. On June 30, 1992, only 142 countries were the members of this institution, out of them 24 were designated as the developed countries and the remaining as the less developed countries. During the recent years, China and several East European countries too have joined this institution. Presently 184 countries are the members of the IDA.
Organisation:
The organisational structure of the IDA is similar to that of the World Bank. It has a Board of Governors, Executive Directors and a President, all of whom are the holders of these positions in the IBRD. They serve as the ex-officio members at the IDA.
Essay # 3. Capital Structure of IDA:
The capital resources of the IDA are constituted by the subscription of member countries and supplementary resources. Initially the subscription of the member countries to IDA amounted to 1000 million U.S. dollars. For the purpose of subscription and voting power, the member countries of the IDA have been put into two categories.
The developed countries are Part I member countries and the less developed countries are Part II member countries. Part I member countries were required to pay their entire subscription quota in gold or freely convertible currencies which IDA can utilise for extending loans to the LDC’s.
Part II member countries were required to pay only 10 percent of their subscription quota in terms of gold and freely convertible currencies and the remaining 90 percent in their local currencies which the IDA cannot use for granting loans without the prior consent of the member country, the currency of whom is required for lending. The IDA can obtain supplementary resources from the Part I member countries from time to time to augment its resources and undertake lending operations on a larger scale.
On June 30, 1992, the total subscription and resources of Part I members aggregated 69.75 billion U.S. dollars and those of Part II members amounted to 2.95 billion U.S. dollars. Since its inception, IDA funds have been replenished seven times by Part I member countries upto 1987. Between 1961 and 1964, the U.S.A. and U.K. were the principal donor countries. They accounted for 42 percent and 17 percent of total IDA resources respectively. In the subsequent years, their share got reduced.
During 1981-83 periods, the U.S.A. and U.K. accounted for 27 percent and 10 percent of its total resources respectively. The share of France declined from 7 percent to 5 percent in this period. The contributions of Germany, Japan and the OPEC had risen. During 1981-83 period, the share of Germany rose from 7 percent to 13 percent, that of Japan from 4 percent to 15 percent and that of the OPEC from 1 percent to 6 percent.
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39 donor countries of the IDA endorsed in November, 1998 the twelfth replenishment of the IDA amounting to 20.5 billion dollars for a period of three years commencing from July 1, 1999. In 2005, subscriptions of Part I member countries amounted to US $ 119.11 billion and those of Part II members amounted to US $ 3.92 billion.
The voting power of the member countries in the IDA is not in proportion to their respective subscription quotas. Part I member countries (i.e., Developed countries) although contribute 97 percent of the total resources of the IDA, yet enjoy 69 percent of the total voting power. The U.S.A. and Britain together subscribed originally 37 percent of its total financial resources but had only 33 percent of its total voting power. It implies that the less developed countries have relatively greater decision-making power at the IDA.
Essay # 4. Criteria for IDA Assistance:
IDA credit is extended on the basis of the following three criteria:
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(i) Poverty Test:
The IDA credit is meant for those poor countries which are greatly handicapped by excessive dependence on primary products, heavy burden of debt servicing, and in case of which the growth rates of population outweigh the gains due to increased production and development.
(ii) Performance Test:
The member countries seeking assistance from the IDA should have an adequate standard of performance in respect of overall economic policies and past success in the execution of projects.
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(iii) Project Test:
The project test requires that the proposed project should yield the financial and economic returns large enough to justify the use of scarce capital. It means the standard or criterion for the appraisal of the project for IDA assistance is the same as is applied in the case of the Bank projects. In other words, IDA no doubt advances soft loans but it does not finance the soft projects.
Essay # 5. World Bank and the IDA:
The World Bank and the IDA are the complementary financial institutions as both cater to the financial requirements of the member countries for promoting their development programmes. But there are significant differences in the approaches and attitudes of the two.
They are:
(i) The IDA assistance to member countries is on concessional and flexible terms than the conventional lending operations of the World Bank. The IDA loans are extended for a period 5 to 15 years or even more. In the case of very poor countries, the period of loans is sometimes 40 years or more. The maturity of World Bank loans, in contrast, is very short. The repayments of IDA loans begin after a long grace period of 10 years. In comparison the grace period for the commencement of repayments of World Bank loan is shorter.
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The World Bank loans are extended now at the interest rates consistent with the market rates. The interest rates on IDA loans are comparatively much lower. In certain cases, IDA loans bear no interest at all and cover only the administrative charges. During the recent years, IDA has advanced loans to the less developed countries in many cases at just 0.75 percent rate of interest. It is, therefore, evident that terms of loans given by IDA are very soft and flexible. That justifies IDA being called as a “Soft Loan Window”.
(ii) While the World Bank loans are required to be repaid in terms of SDR’s or in terms of one of the principal currencies, the IDA loans can be repaid by the borrowers in terms of even local currency. The borrowers, therefore, have not to worry about arranging the scarce foreign exchange for the repayments to the IDA.
(iii) The World Bank invariably extends loans for specified projects. On the opposite, a substantial part of IDA assistance is in the form of non-project aid.
(iv) The World Bank extends loans directly to the member countries or grants loans out of funds raised in the market of the member country. The World Bank loans to the public or private agencies in member countries are required to be guaranteed by the government of the member country. In contrast, there is no insistence upon any guarantee from the member government in the event of grant of loan by the IDA.
(v) The World Bank takes into account the credit-worthiness of the borrowing country before advancing loans to it, while the IDA does not insist upon this factor. Therefore, even those countries which cannot obtain borrowings from the IBRD can get loans from the IDA.
(vi) The World Bank finances projects which satisfy the criteria of credit-worthiness. It finances such projects which can assure a profitability of 10 percent. IDA, on the other hand, does not impose such conditions on assistance and renders concessional assistance for executing programmes related to education, public health, nutrition and other social utilities.
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Essay # 6. IDA and Less Developed Countries:
IDA has been a powerful vehicle of development assistance to the LDC’s. In fact, this arm of IBRD is meant essentially to cater to the capital requirements of the capital-famished poor countries and renders concessional financial aid to them. It extends both project and non-project aid to these countries for longer durations.
The assessment of the IDA assistance to LDC’s may be made on the basis of the following facts:
(i) Expansion in the Volume of Credit:
By the end of June 1975, the IDA had approved loans aggregating $ 8.43 billion mainly for the countries included in Part II. By the end of June 1992, the aggregate credit extended by IDA had raised upto $71.07 billion. Thus, the lending operations of this institution expanded by 8.42 times between 1975 and 1992. Since its inception, this institution has extended credit for 2218 project and non-project proposals received from 86 member countries.
During the fiscal year ending 30th June 1992, IDA provided finance to 50 member countries for 110 projects and programmes involving an amount of $ 6.55 billion. According to World Bank Report, 1995, the concessional IDA assistance to the poorest countries with per capita GNP of $ 695 or less was of the amount of $ 4.7 billion. The IDA gross disbursements in financial year 2005 were $ 8.7 billion compared with $ 4.7 billion in the year 1995.
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(ii) Region-Wise Distribution of Assistance:
Until the mid 1980’s, the major share of IDA assistance went to the LDC’s of South Asia and Africa. But in the last decade or so, there has been a gradual shift in the region wise distribution of IDA assistance.
In the year 2005, the less developed African countries could obtain 45 percent of the total credits of $ 3.92 billion provided by this institution. It was followed by 45 percent and 12 percent respectively advanced to the countries of South and East Asia respectively. The Latin America and Caribbean countries accounted for just 3 percent of IDA assistance.
(iii) Distribution of Credit According to Purpose:
In the LDC’s, the IDA assistance has promoted programmes related to agricultural and rural development, spread of literacy, development of backward regions, development of economic infrastructure, control of population, control over mortality rate through assisting health and nutritional programmes and improvement in the standard of living.
During 1977-82 periods, 42 percent of IDA credits were meant for agriculture and rural development and 29 percent were meant for strengthening of economic infrastructure including energy, transport and communications. In the fiscal year 2005, the largest allocation of 26 percent went to law, justice and public administration, followed by 16 percent, 12 percent and 11 percent for projects in health and other social services, transportation and energy and mining sectors respectively of 66 member countries.
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(iv) Pattern of Official Development Assistance (ODA):
The international conference on financing for development at Monterry in Mexico in March 2002 recognized that a substantial increase in the ODA and other resources would be required to realize the internationally agreed development goals. The concrete efforts by the developed countries are needed to provide assistance upto the target of 0.7 percent of their GNP specified by the United Nations as the ODA to developing countries and 0.15 to 0.20 percent to the least developed countries.
The then U.N. Secretary General pointed out that an additional assistance of at least 50 billion dollar per year, i.e., the doubling of the present level of ODA is needed to achieve the desired goal. It is extremely disappointing that the ODA has, over the years, declined steadily from 0.35 percent in 1990 to 0.22 percent in 2002.
The total ODA to the less developed countries amounted only to $ 53.7 billion in 2000. At the Monterry Summit, the offer of the EU to raise the ODA from 0.33 percent in 2006 and that of the United States to raise it by $ 5 billion over three years had been too inadequate and utterly impressive.
The Official Development Assistance (ODA) from government to government basis which was 8.7 percent of the IDA assistance since its inception, has been unfortunately found to be politically- oriented. The larger flow of such assistance has gone to those countries which are political allies of the Western countries and support their political thinking.
The countries which follow independent political thinking have been generally denied this form of assistance. For instance, Senegal and Pakistan received $ 46.1 and $ 13.5 per capita respectively out of IDA assistance, while India and China could receive only $ 0.01 and $ 3.4 per capita respectively.
Despite this discriminatory feature of IDA assistance, it may still be recognized that the IDA assistance is of immense significance for the LDC’s. The availability of concessional assistance for longer periods through IDA has contributed in relieving the BOP deficits and in speeding up the pace of development in these countries.
Essay # 7. IDA and India:
Right from the inception of IDA, India has been one of its members. This country has derived much benefit from the credits obtained from the IDA. In fact, India has been the largest recipient of IDA assistance. Upto the year ending March 2002, the total credit flow from IDA to India was of the amount of U.S. $ 19.44 billion. It had approved 186 credit proposals from India and has certainly contributed in a positive manner in financing various development projects. India has also received sizeable non-project aid from the IDA.
Upto June 1975, India received loans amounting to $ 3.44 billion U.S. dollars for 70 projects. These included loans for road construction and improvement, irrigation, flood control and drainage, energy, telecommunications, port development and shipping, electrification of railways, import of commercial vehicles, industrial machinery, construction equipment, agricultural machinery, fertilizers, pesticides, fruit processing, dairy projects, cotton development, garbage disposal and improvement of environment hygiene.
Between 1975 and 1992, India received IDA assistance of the volume of $ 6.52 billion in the form of 62 credits for agriculture and rural development, forestry, power, flood control, irrigation, fisheries, research and extension projects, transportation, water supply and sewerage, import of fertilizers and chemicals, population, health and non-projects.
It is evident that IDA’s liberal concessional aid to India has contributed much in the creation of economic infrastructure and social capital in the country. In the absence of massive concessional IDA assistance, the pace of development in the country would have been much slower.
India although was in great need of soft loans from the IDA for executing her development programmes and projects during the 1990’s, yet there were certain disconcerting developments in the international spheres.
The U.S.A. and some other advanced countries had been pressing upon the World Bank to reduce the flow of concessional IDA loans to India. They insisted that India had graduated to the category of developed countries on the basis of GNP criterion and, therefore, she should rely upon the market borrowings rather than the ‘Soft Loan Window’ of IDA.
In pursuance of this design, the advanced countries managed through IMF the revision of India’s economic ranking. In its May 1993 report, IMF ranked India as the World’s sixth largest economy. That ranking placed Indian economy even above the economies of the United Kingdom, Canada, Italy, Australia, Spain and Brazil. That high ranking was used as a pretext to deny India the concessional assistance from the IDA.
The insistence of some western countries that India had graduated from IDA assistance was based upon the GNP criterion. In 1982, graduation ceiling for IDA loan was a per capita income of $ 730 at 1980 prices. Even in 1993, India’s per capita income was below that ceiling. Therefore, India should not have been treated as ineligible for concessional assistance from the IDA.
India remained the most prominent recipient of IDA soft loans till the mid-1980. Her share had been shrinking in the IDA assistance since the latter half of 1980’s. In the year ending June 1986, India’s share in IDA concessional assistance was 19.9 percent. In the subsequent year, it fell to 19.4 percent.
In the year ending June 1992, the proportion went further down to 15.6 percent. This decline in India’s share out of total IDA assistance continued even in the later years on account of increased demand for concessional assistance from China and the East European countries. It is really a matter of some worry for India.
The country, nevertheless, actually received from the IDA assistance of the amount of $ 4.8 billion during 1993-98 periods. Out of the 11th replenishment of IDA funds for 1996-99 periods, India’s share was 3.2 billion dollars. The share of this country out of the 12th replenishment of IDA funds amounted to 20.5 billion dollars for a period of three years commencing from 1st July, 1999 was 3.5 billion dollars.
As this IDA funding was meant for schemes falling under the category of basic human needs, it did not come under the economic sanctions imposed by the U.S.A. and some other developed countries on India after the nuclear tests conducted by India in May 1998.
In 1998-99 and 1999-2002, the IDA assistance to India was of the amounts of $ 3.65 billion and $ 3.60 billion respectively. The interest and service charges paid by India on IDA assistance were of the magnitude of $ 1.65 billion over three year period 1997-2000.
The World Bank approved a $ 54 million credit from IDA for India in 2003 in order to help improve the quality and safety of food and drugs in the country. The IBRD and IDA commitments for India during 2003 stood at $ 1.52 billion against $ 2.19 billion in 2002.
In the fiscal year ending June 2004, IDA extended four credits amounting to US $ 1 billion to the states of Andhra Pradesh, Maharashtra, Rajasthan and Uttar Pradesh for projects related to health, sanitation, drinking water and transport.
The IDA assistance authorized to India during 2005-2009 period amounted to US $ 4.69 billion, out of which loans amounted to US $ 4.68 billion and grants were just US $ 13.18 million. In 2013-14, assistance authorised to India by the IDA amounted US $ 2.135 billion. In 2014-15, the IDA assistance authorised to India was of the order of U.S. $ 1.73 billion.
It is undoubtedly a recognised fact that the IDA, since its inception, has been making very vital contribution in social and economic development of India. The developing countries of the World, including India, therefore, rightly look upon this soft loan window of IBRD with great expectations.