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					            PROGRESS IN THE IMPLEMENTATION OF THE
          RECOMMENDATIONS OF THE COMMONWEALTH
       SECRETARIAT/WORLD BANK JOINT TASK FORCE REPORT


                   SMALL STATES: MEETING THE CHALLENGES
                          IN THE GLOBAL ECONOMY


                                Paper by the Commonwealth Secretariat


                                                      CONTENTS


                                                                                                                          Page

        BACKGROUND ...................................................................................................... 1


I.      COMMONWEALTH SECRETARIAT ................................................................ 2
        Consensus Building and Policy Development ........................................................... 2
        Tackling Volatility, Vulnerability and Natural Disasters .......................................... 4
        Transition to the Changing Global Trade Regime ..................................................... 6
        Strengthening Capacity .............................................................................................. 8
        New Opportunities and Challenges from Globalisation ............................................ 8
        Tracking the Implementation of the Recommendations ............................................ 9


II.     WORLD BANK ....................................................................................................... 9


III.    INTERNATIONAL MONETARY FUND ............................................................ 9

IV.     UNITED NATIONS CONFERENCE ON TRADE AND
         DEVELOPMENT .................................................................................................13


V.      EUROPEAN UNION ...............................................................................................16
        The Continuous Involvement of the European Union in the .....................................
         Debate on Small States ...........................................................................................16
        Adapting Development Policy to the Needs of Small Economies ............................17
        The Small Economies and the New Development Policy 2000-2001 .......................18
        The Small Economies and the New ACP-EU Relations ...........................................18
        Harmful Tax Practices ...............................................................................................19
        Other Issues ................................................................................................................19


VI.     WORLD TRADE ORGANISATION ....................................................................20


VII.    ASIAN DEVELOPMENT BANK ..........................................................................20
        Performance-Based Lending ......................................................................................21
        Regional Strategy for the PDMCs .............................................................................22


ANNEX I World Bank Group Progress Report 2001 ........................................................24

ANNEX II         Table 1: Small States under Lomé and Cotonou .............................................38




                                                                   ii
1.      This paper reviews the progress that has been made by the Commonwealth Secretariat
in implementing the recommendations of the Commonwealth Secretariat/World Bank Joint
Task Force on Small states1. It also reports on the progress that the partner organisations who
participated in the preparation of the Report, the World Bank, the International Monetary
Fund (IMF), World Trade Organization (WTO), European Union, the United Nations
Conference on Trade and Development (UNCTAD), and the Asian Development Bank, have
made in implementing the action contained in their frameworks.


BACKGROUND

2.       The Joint Task Force Report presented to the April 2000 meeting of the Development
Committee reflects the broad consensus that emerged on the special development challenges
and vulnerability of small states and on the ways to address these challenges through a
combination of domestic policy action, in some cases, new approaches to regional co-
operation, external support and assistance from multilateral and bilateral development
institutions, and improvements in the external environments of small states that would
increase their trade prospects and attract capital flows.

3.      The Report made wide-ranging recommendations on the actions that need to be taken
not only by the small states themselves but also by the international community, and in
particular by the multilateral organisations including the Commonwealth Secretariat, World
Bank, IMF, WTO, the European Union and UNCTAD. It has helped to secure international
recognition of the special needs and vulnerabilities of small states which the partner
organisations are addressing in their programmes of assistance to small states.

4.      The Development Committee welcomed the Report and its analysis of the special
characteristics of small states that makes them particularly vulnerable. It also noted the
Report‘s recommendations that the circumstances of small states should be taken into account
in the policies and programmes of multilateral trade, finance and development organisations.

5.      The Report was also welcomed by Commonwealth Finance Ministers at the Malta
meeting, in September 2000. Finance Ministers endorsed its recommendations and the
follow-up activities for the Commonwealth proposed in it. They also endorsed a proposal that
the Secretariat co-operate with the World Bank in reviewing progress on the active agenda set
out in the Report. The Secretariat attaches high priority to continued work by the
Commonwealth in supporting the integration of small states in the global economy, and
helping them take advantage of the opportunities and meet the challenges arising from
globalisation.

6.      The following sections of the paper reviews implementation of the recommendations
by the partner organisations.




1
  The Final Report of the Task Force, Small states: Meeting the Challenges in the Global Economy, was
published in April 2000 and presented to the Development Committee.


                                                      1
I.     COMMONWEALTH SECRETARIAT

7.      Since the publication of the Report, the Secretariat has continued to place high
priority on promoting the interests of small states. The Secretariat‘s work on small states is
broadly divided into two categories. First, those activities that predominantly deal with
consensus building and policy development; and secondly, provision of technical assistance
and capacity building. Work on small states is carried out by all the divisions that undertake
policy development work and those involved in delivering technical assistance. Following the
publication of the Report, all divisions have oriented their programme activities to address its
recommendations.

8.      Small states issues and the future role of the Commonwealth in promoting their
interests featured prominently in the deliberations of the Commonwealth High Level Review
Group, which examined the future role of the Commonwealth. Its Report will be considered
by Heads of Government (CHOGM) at their meeting in Brisbane, Australia in October. It is
expected that Heads of Government will endorse a continued role for the Commonwealth in
promoting the interests of small states and forging an international policy environment that
advances these interests.

9.      The range of activities that the Secretariat has been involved in will also be reported
in detail to the Ministerial Group on Small States (MGSS) which will meet on 5 October
2001, just before the Heads of Government meeting. The Brisbane MGSS will provide the
first opportunity for Commonwealth governments to review the implementation, by the
Commonwealth and other partner organisations, of the recommendations of the Joint Task
Force Report, since its completion. The MGSS, through such a review, would be able to
clarify the most productive areas in which further work could be undertaken by the
Commonwealth and other agencies.

Consensus Building and Policy Development

10.      The Secretariat expects that the major initiatives that have been taken on behalf of
small states, particularly by the Commonwealth, United Nations and the World Bank would
be intensified in the years ahead. This is necessary because although the profile of small
states in the international system has been raised, these states still face multifaceted
vulnerabilities and, therefore, the Commonwealth should still remain vigilant and
comprehensively engaged in advocacy work. This advocacy work should focus particularly
on actions to address the impact of international initiatives, which have the potential to
undermine the economic well being of small states. These include the erosion of trade
preferences, especially in agriculture; the extension of WTO disciplines on subsidies and
countervailing measures; the harmful tax competition initiative by the OECD; and attempts to
shift from financial incentives towards the free market for financing the private sector. These
actions underline the continuing economic vulnerability of small states and the need for
enhanced vigilance in defence of their interest.

11.     The Secretary-General has been informally consulting some governments on the
possibility of holding a Commonwealth Summit on Small states in July 2002 to focus on
these and other issues of their vulnerability and develop a comprehensive strategy to address
them. The Summit would review the progress made in advancing the interests of small states
in the international system and provide guidelines for a programme of work to follow-up on
and consolidate the initiatives already taken. The Secretariat expects that such a Summit


                                                2
should enable Heads of Government to give the new agenda for small states a solid launch.
The MGSS, at their meeting in Brisbane, is expected to make further suggestions on the
issues that the Summit could address and recommend to CHOGM that the special Summit be
held.

12.     A large proportion of the Secretariat‘s resources are devoted to small states. In the
work programme for this and subsequent years, the Secretariat is committed to maintaining
and, where possible, expanding current levels of support for small states development, in
terms of both consensus building and policy development and provision of technical
assistance. In the consensus building and policy development work, the Secretariat:

              collaborated with the World Bank in organising the first Small states Forum in
               Prague, in the wings of the annual meetings of the World Bank and the Fund.
               The Forum provided the first opportunity for all small states and the partner
               organisations in the Joint Task Force to take stock of activities that had been
               undertaken to implement the recommendations of the Report. The Forum
               endorsed the continuation of the activity as an annual event that would provide
               an opportunity to discuss issues of special interest to small states and enable
               the various partner organisations to report on their programmes of work in
               support of small states. The Secretariat has continued to collaborate with the
               World Bank in the organisation of the Second Forum scheduled to be held on
               1 October 2001. This year‘s Forum will focus on trade issues and it is
               expected to discuss in detail the position of small states in the WTO.

              upgraded and is in the process of broadening the marketing of its annual
               publication, Small States: Economic Review and Basic Statistics, which is a
               unique review of small states economies. In upgrading this review, the
               Secretariat is working towards broadening the statistical coverage by obtaining
               directly from the countries any data that is not readily available from the
               international sources from where data is drawn.

              is finalising a dedicated website for small states that aims at improving
               information access and dissemination. The website will provide
               comprehensive information on the activities undertaken by the Secretariat; it
               will also provide access to the small states statistical database developed by
               the Secretariat and make it widely available.

              published a volume, Small States in the Global Economy, incorporating all key
               papers and research materials presented at the various conferences and
               meetings organised by the Task Force. The book is intended to help policy
               makers in small states and in multilateral and other organisations in addressing
               and developing the future agenda for small states that the Task Force set out.

13.      In the provision of technical assistance and capacity building, the Secretariat‘s efforts
in implementing the Task Force recommendations can be considered under the four broad
areas that were considered most critical in the immediate agenda of Small states: tackling
volatility, vulnerability and natural disasters; transition to the changing global trade regime;
strengthening capacity; and taking advantage of the new opportunities and challenges from
globalisation.



                                                 3
Tackling Volatility, Vulnerability and Natural Disasters

14.      The Secretariat is seeking to strengthen its advocacy role on vulnerability. It has
provided assistance to member countries threatened with graduation. It was recently involved
with assisting the Government of the Maldives to prepare its defence against the proposal to
graduate it from the list of Least Developed Countries (LDCs). The main findings from the
work done on the graduation issue for the Maldives have implications for other small states
that are on the threshold of graduation. Generally, these states view graduation as a shock that
will have adverse repercussions on their development. As a result, they offer considerable
resistance to graduation. Cognisant of this, the United Nations is in the process of reviewing
its policy on graduation during the period 2001-2003 for the purpose of introducing measures
that will ease the transition of graduating states. This presents an opportunity for the
Commonwealth to influence this policy, particularly since the United Nations has indicated
its willingness to work with and seek the views of other agencies in this process.

15.     The main findings from the work done on the Maldives were the following: i) the
vulnerability question is not adequately tackled by the United Nations‘ vulnerability index
because this index is essentially an economic one that does not give environmental
vulnerability the attention it deserves; ii) globalisation and trade liberalisation have
implications for graduation since the two sectors most affected are the trade sector,
particularly commodity exports, and the government sector, because of the adverse effects of
graduation on Official Development Assistance (ODA); and iii) the three-year transition
period for graduation is too short a period to minimize the disruptive effects of graduation.
Thus, the adverse effects of graduation are dependent on the magnitude and diversity of
exports and ODA, which differ among states.

16.     The above findings indicate it is desirable that changes in the United Nations‘ policy
on graduation should: combine the results of economic and vulnerability indices into a
composite index of vulnerability; increase the transition period to five years; and introduce
specific measures to ensure a smooth transition. Donor agencies can establish specific
programmes that are directed to the transition period, and the Secretariat‘s work on small
economies and vulnerability will be essential for this purpose.

17.    Support has been provided to a range of small states in the establishment of national
and regional capital markets and stock exchanges. The projects that the Secretariat has been
involved in have been concerned with assisting governments in the preparation of legal and
regulatory frameworks for capital market activities.

18.     Many small states have developed offshore financial services industries as one way to
counter the decline in income from primary production and to effectively participate in a
rapidly globalising world economy. Many of these countries will be adversely affected by the
sanctions, which the Organisation for Economic Co-operation and Development (OECD) has
threatened to implement against jurisdictions that are judged to have ―harmful tax
competition‖. This has been a major concern for small states.

19.     Many of the Commonwealth jurisdictions listed have objected strongly at the highest
political levels to the processes currently being undertaken by the OECD. The lists were
drawn up without reasonable consultation with the jurisdictions involved, and decisions were
taken by the OECD without regard to the efforts already undertaken or being planned by the
various jurisdictions to implement changes. These initiatives, if allowed to continue, could


                                                4
result in the assumption by these institutions of the powers to tell sovereign states if and how
to tax, thereby compromising their sovereign rights.

20.      The issues were discussed at the Commonwealth Finance Ministers‘ Meeting in 2000,
in Malta. Ministers recognised that tax competition could in fact be helpful and not
necessarily harmful because it can encourage governments to create fiscal environments
conducive to generating growth and employment. They also took the view that there was a
need to take early confidence-building measures, combined with a serious effort to develop a
shared perspective on the way forward, as the basis for arriving at a common framework and
agreed timetable for future actions. They requested the Commonwealth Secretariat to
facilitate this process in appropriate ways.

21.     The Commonwealth facilitated a multilateral dialogue between the affected
Commonwealth nations and the OECD after being mandated to do so at the Finance
Ministers‘ Meeting, in Malta. High Level consultations were held, in Barbados, in January
2001 between the OECD countries and affected non-OECD Commonwealth jurisdictions,
resulting in a decision to establish a Joint Working Group to try to achieve an agreement. The
Working Group met twice, and achieved significant movement from the side of the non-
OECD jurisdictions by getting substantial commitments to the OECD principles of
information exchange, transparency, and non-discrimination to a deadline of end 2005.

22.     The Commonwealth continues to seek multilateral dialogue and negotiated resolution
of the issue without threat of sanctions, which it regards as being contrary to the spirit of
peaceful multilateral negotiations of treaties and conventions. The Commonwealth will
continue to seek to build consensus and co-operative solutions on this matter.

23.     The Commonwealth is currently working with its member countries and other
international organisations on the possibilities of facilitating technical assistance to the
Commonwealth jurisdictions affected, or potentially affected, by the OECD Initiative to build
capacity in their financial sectors, including strengthening financial standards and good
governance processes, as well as in improving the economic competitiveness of their
international business services sectors.

24.     The Secretariat has continued to monitor natural disasters and their impact on small
states. Assistance has been provided to countries in the Caribbean and the South Pacific for
the development of regional integration programmes for water resource management and to
develop or strengthen programmes in the management of Exclusive Economic Zones (EEZ),
Costal Zones, Fisheries and other environmental resources. Future work on environment and
sustainable development will focus more on the impact of environmental degradation and
natural disasters on the economies of small states.

25.      The Task Force Report called for exploration of ways in which the private sector
could develop insurance instruments to cover natural disasters in small states. The Secretariat
facilitated a private sector initiative by the Commonwealth Disaster Management Agency Ltd
(CDMA) aimed at addressing this recommendation. The proposal for the establishment of
this Agency was presented at the Commonwealth Finance Ministers Meeting in Malta, which
welcomed the initiative in their Communiqué. CDMA has actively disseminated its proposal
to Commonwealth and other governments, the World Bank and the IMF, the Caribbean
Development Bank and other lenders, and has discussed it with a number of Commonwealth
Ministers and their officials.


                                                5
26.     In the Caribbean area, Belize, Antigua and Barbuda and St Kitts and Nevis have
decided to take out a policy, and negotiations on the details are under way. There is also
interest in some of the British Overseas Territories such as Anguilla and the Cayman Islands.
CDMA has also been in active dialogue with Jamaica, which is considering the detailed
information requested. In the Indian Ocean, the Seychelles has been given a proposal which
they are considering and Mauritius has expressed interest. Papua New Guinea, Fiji, Samoa
and the Solomon Islands have been approached with proposals specifically tailored to the
environmental threats they face.

Transition to the Changing Global Trade Regime

27.      Small states trade issues have been one of the areas of principal focus of the
Commonwealth Secretariat. A programme to strengthen the existing Commonwealth Trade
facility, in Geneva, is under way. It currently provides support to small member countries in
their relations with the WTO on notifications, negotiations and use of the Dispute Settlement
Mechanism. The strengthening of this facility would enable it to also provide advisory
service on new issues in the WTO, and to focus on the special problems of Small states in
multilateral trade negotiations. The Secretariat is also developing various options to assist
governments not represented in Geneva to follow WTO issues and build capacity in capitals.
It has developed a series of Briefs which inform member countries on current issues and
provide analysis of them.

28.     The Secretariat has also started a series of projects to address several of the critical
trade policy issues confronting small states and to contribute to the formulation of a strategy
that would favour greater integration of small states in the world economy. The projects
involve three types of interventions. The first is through policy-oriented studies; the second
through studies pertaining to the shift in trade regime and alternative ways of dealing with
trade policy issues confronting small states; the third is in the form of policy dialogue and
direct interventions at the request of governments.

29.    Studies that are currently underway include the following.

              A Quantative Analysis Of The Operating Costs In Commonwealth Small
               Economies And Their Impact On Trade And Investment.

               The study intends to achieve a number of objectives. First, it will help to
               pinpoint areas where the private sector faces problems of high costs that
               render exports uncompetitive. This will in turn facilitate a more systematic
               and rigorous approach to developing appropriate solutions to these problems.
               Secondly, it is meant to add weight to the mounting evidence of the constraints
               on the development of the private sector in small, isolated and physically
               dispersed economies. This will also provide support for the small states
               ambassadors in Geneva and Brussels who are seeking recognition from the
               international community of their particular constraints to trade development
               and integration into the global economy.




                                                6
              Alternative Special And Differential Treatment Arrangements For Vulnerable
               Economies.

               Thus far, attempts by small states to obtain formal recognition at the WTO
               from both developed and developing countries have not yet met with success.
               This study focuses on how de minimis provisions and other alternative
               modalities could be used as an interim step to obtaining the recognition that
               small, vulnerable economies seek as a separate category. De minimis
               provisions may be more acceptable to the international community and to
               larger developing and least developed countries because they would benefit all
               developing countries.

              Financial Instruments To Assist The Development Of Exports From Least
               Developed Countries And Small Vulnerable States

               The liberalisation of trade on a most favoured nation (MFN) basis would erode
               and eventually eliminate any commercial value of the system of trade
               preferences for developing and least developed countries that was created in
               the 1960s. As the process of globalisation continues and accelerates, decisions
               over the location of export-oriented investment will increasingly be decided
               purely by commercial considerations. Under such circumstances, it may not be
               possible for small isolated and least developed countries, which are inherently
               disadvantaged in terms of high operating costs to attract export-oriented
               investment. Trade preferences assisted such countries, with limited success, in
               attracting investment to export oriented industries. The study focuses on
               options that exist for engineering alternative financial instruments or funds
               that would provide direct incentives to the private sector to invest in export
               oriented activities in such economies. It reviews existing multilateral financial
               facilities designed to assist the development of export-oriented private sector
               in small, vulnerable and least developed countries and see why many have
               been of limited success in the past. It proposes a facility, which could be a
               negotiated instrument in any new round of multilateral trade negotiations that
               evolves into a genuine ‗development round‘.

              A Needs Assessment Survey Of A Representational Facility For Non-resident
               WTO Members

               There are presently 29 WTO members who are either too small or too poor to
               be able to establish permanent resident missions at the WTO. Without their
               presence the legitimacy of the outcomes of any future round of multilateral
               negotiations will be called into question. The Needs Assessment Survey is
               being undertaken following a strong call from non-resident ambassadors for
               assistance from the Commonwealth.

30.     The Secretariat has provided direct assistance to Pacific Island countries with regional
trade integration. The main area of activity has been the development of the Pacific Free
Trade Area which has been accepted politically and is currently being negotiated. Technical
assistance in this area would continue.



                                                7
31.   The Secretariat has also facilitated the meetings of Inter-governmental Organisations
(IGOs) of small states - namely the CARICOM, the South Pacific Forum and the Indian
Ocean Commission to develop a strategy for the formation of a small states Alliance at the
WTO.

32.     In addition to these various initiatives, the Secretariat will continue to provide support
to small states as they negotiate new trade agreements and other relations with the European
Union under the Cotonou Partnership Agreement between the African, Caribbean and Pacific
states (ACP) and European Union that succeeded Lomé IV. This support will be provided in
close collaboration with member governments, the ACP Secretariat and the administrators of
the European Union‘s assistance facilities.

Strengthening Capacity

33.     The Commonwealth Secretariat intends to strengthen its support for regional
organisations dealing predominantly with Small states - viz. the Secretariats of the Caribbean
Community (CARICOM), the Indian Ocean Commission (IOC) and the South Pacific Forum
(SPF). This is already in train, in terms of assistance in preparations for the next WTO
Ministerial Meeting. This assistance will be extended to other areas of interest to regional
organisations, where the Secretariat has a particular expertise. This could include mattes
relating to governance, anti-money laundering measures, investment codes, common taxation
regimes, and arrangements relating to international financial centres and customs rules.

New Opportunities and Challenges from Globalisation

34.     The Trade and Investment Access Facility (TIAF) continue to play an important role
in funding technical assistance to address small states issues. Demand for the Facility
reflected the desire by Commonwealth small states to improve their ability to manage the
effects of globalisation. There was strong demand for assistance in trade negotiations,
preparation for accession to the WTO, assistance to take part effectively in ACP-EU
discussions and capacity building in updating trade legislations.

35.      In March 2000, ten small island states from the South Pacific, took part in a
Roundtable on the WTO Agreement on Agriculture. This workshop was part of a series of
initiatives to update both current and prospective WTO member countries from the Pacific,
on the implications of the Agreement for fisheries and agricultural products from the region.

36.     A number of analytical trade briefs have been developed for Geneva missions and
capitals, many of which address trade issues of great concern to small states. These include
the Trade Intellectual Property Rights Agreement (TRIPS) and the implications of
commitments made under this Agreement for potentially lucrative industries, such as
pharmaceuticals, indigenous medicine and cultural products.

37.     In response to requests from small states for analytical support to develop trade
negotiating briefs, over the last eight months, TIAF has supported several programmes aimed
at assisting Trade Ministries to build their technical ability to effectively address a wide
cross-section of trade concerns2.


2
    The implications of the Everything but Arms proposal, International Mobility and the WTO etc .


                                                          8
38.    Some 48 projects have now been funded by TIAF, all through donor funding from
Australia, Canada, New Zealand and United Kingdom. The four donors have to date
contributed a total of £1.84 million to the Facility, with a further £1.5 million pledged over
the two years to 2002.

39.    In the area of investment, the Secretariat has been playing a catalytic role in
promoting private capital flows to member countries through the Commonwealth Private
Investment Initiative (CPII), initiated in partnership with the Commonwealth Development
Corporation (CDC). Four regional venture capital funds have been launched, of which two
are specifically oriented towards small states; viz. the Tiona Fund in the Caribbean, and the
Kula Fund in the Pacific. The Secretariat will explore further ways to develop new
instruments to mobilise such financial flows to the benefit of small countries, keeping the
commercial viability of projects as a priority.

Tracking the Implementation of the Recommendations

40.    The Secretariat believes that the annual consultations of Commonwealth Finance
Ministers and the biennial MGSS and the Commonwealth Heads of Government Meetings
should continue to provide useful opportunities to track progress in the implementation of the
recommendations of the Report within the Commonwealth and to suggest new initiatives for
collaboration with partner organisations. The Secretariat will continue to engage the partner
organisations on a regular basis to discuss progress in the implementation of the
recommendations and to develop other initiatives for small states. In particular, the
Secretariat intends to use the biennial MGSS meetings as an opportunity for the partner
organisations to report to the Commonwealth on their work on small states. The MGSS
meeting, in Brisbane, will be the first of such opportunities. The major partner organisations
have been invited to the meeting as observers.

41.   The Secretariat will also work closely with the World Bank in the organisation of the
Annual Small states Forum, which provides another multilateral avenue for tracking the
implementation of the recommendations of the Report.


       II.     WORLD BANK

42.     The World Bank has played a key role in promoting the Report and its
recommendations as the guiding framework for promoting the interests of small states and
developing programmes for their support. As part of the implementation of the Task Force
recommendations, the Bank, in collaboration with the Secretariat, organised the first Annual
Small States Forum, in Prague, in September 2000. The Bank is committed to continue
supporting small states in its mainstream activities. It has also established a unit, which is
dedicated to co-ordinating small states work within the Bank. A detailed report by the Bank
on its implementation of the recommendations is contained in Annex I.


       III.    INTERNATIONAL MONETARY FUND

43.    From the Fund‘s vantage point, key challenges described in the Report include the
adaptation to:



                                               9
               (i)     changes in the world trading and financial systems;

               (ii)    the declining availability of grants and concessional funds; and

               (iii)   the high costs of smallness in terms of the provision of services (such
                       as human resource skills, which in turn define the special technical
                       assistance needs of small states).

44.     As regards policies, the Report underscores (1) the importance of sound domestic
policies for the successful transition of small states into the ‗new‘ global environment, and
(2) regional co-operation among small states. These are integrated to the Fund‘s policy advice
on small states.

45.    The Fund‘s framework (set out on pages 73-79 of the Task Force‘s Report) focuses on
the provision of support to member countries (large as well as small) through policy advice
(under Article IV surveillance) and financial and technical assistance. It emphasises that
advice and assistance are tailored to each country‘s specific circumstances and needs,
including special factors related to size.

46.    The Report provides a brief review of recent and prospective developments in the
IMF‘s activities specifically affecting small states.

47.     While the Fund‘s contribution to the intensified effort of the multilaterals to assist
small states is centred on technical assistance to help build capacity and facilitate the
transition to the liberalised trade regime, the Fund has also been strengthening its surveillance
practices for the small states, including through regional surveillance in the Caribbean and
Pacific. Relevant technical assistance will be mainly in the core areas of (1) fiscal policy and
administration, including assistance with replacing revenue lost because of tariff reforms; (2)
monetary policy and exchange rate arrangements, including supervision of the financial
system and functioning of foreign exchange and domestic debt markets; (3) statistical
capacity, especially in the production of fiscal, monetary and balance of payments accounts;
and (4) regional co-operation.

48.    The continuing shift towards the use of regional centres for Provisional Financial
Technical Assistance (PFTA) dovetails well with the recommendations of the Task Force.
Other close fits to the recommendations of the Task Force are:

               (i)     the Fund‘s work on external vulnerability and crisis prevention;

               (ii)    the Fund‘s programme for assessing the quality of regulation and
                       supervision of offshore financial centres (see below), as many of these
                       are developing small states; and

               (iii)   the Fund‘s expertise and experience in value-added taxation, including
                       in small economies, as many small states are expected to suffer heavy
                       revenue losses as a result of tariff-reform.

49.     On the first of these, a separate review is being planned of external vulnerability as it
relates to small states, including, inter-alia, an assessment of whether their international
reserves are adequate, given their special needs, and documentation of the particular benefit


                                                 10
to them of stress tests. On the last, the Task Force Report refers the Fund‘s readiness to assist
countries with resolving issues related to trade liberalisation. Recent examples of Fund
technical assistance in this area include technical assistance reports on the introduction of
value-added taxation in Antigua and Barbuda, and St Kitts and Nevis, and the Fund stands
ready to provide technical assistance in this area on a regional basis in the Eastern Caribbean
as well as elsewhere. The Fund has also provided technical assistance on the revenue
implications of the removal of tariffs on intra-regional trade in the Southern African
Development Community (SADC) and the Common Market for Eastern and Southern Africa
(COMESA); the small states covered in this exercise were Botswana, Comoros, Djibouti,
Mauritius, Seychelles and Swaziland. Also in the fiscal area, the Fund recently provided
technical assistance to Barbados on profile changes to its office tax regime.

50.     The Fund has provided extensive technical assistance to its small state members in
Africa. In the fiscal area, technical assistance has focused on tax reforms, including, for
example, the introduction of a value-added tax system in Mauritius, the reform of income and
sales taxes in Swaziland, and the reform of indirect taxation in the Seychelles. In the financial
sector, Fund technical assistance has helped with the introduction of new banking laws, the
strengthening of bank supervision, and improvements in payments systems (as in Mauritius
and Swaziland), and with foreign exchange liberalization, indirect instruments of monetary
policy and banking sector issues (in the Seychelles). The Fund has also provided support for
the modernization of the regional financial infrastructure, particularly through technical
assistance to COMESA on a "fast payments facility" to facilitate cross-border net settlements.

51.     Technical assistance provided to the Pacific island countries has covered a range of
issues, including bank supervision, payments systems, foreign exchange liberalization,
accounting and auditing.

52.     In the area of banking supervision and regulation, on July 10, 2000, the Executive
Board agreed on a role for the IMF in the assessment of offshore financial centres (OFCs), in
response to the International Monetary and Financial Committee‘s (IMFC) call for addressing
recommendations of the Financial Stability Forum (FSF) relevant to the Fund. (The FSF, in
May 2000, had listed 34 OFCs, as deficient in supervision. The Board approved three
modalities for Fund assessments of OFCs as part of the ongoing programs administered by
the Fund's Monetary and Exchange Affairs department. They are (i) self-assessment, with
assistance from outside experts; (ii) stand-alone Fund assessments of standards, which would
be based on the financial specialization of the jurisdiction concerned; and (iii) comprehensive
assessments of risk and vulnerabilities identifying development needs, institutional
conditions, and observance of standards within the framework of the Financial Sector
Assessment Program (FSAP). These assessments, and the technical assistance provided in the
process, are expected to strengthen the offshore financial systems of the countries involved
and help isolate them from their domestic financial systems. This, in turn, it is expected, will
contribute in time to the removal of these OFCs from the FSF list.

53.     As of end June 2001, the Fund has undertaken missions (most of them of a
preliminary, information-gathering nature) to 19 OFCs, all but one of them small states and
not all of them members of the Fund; another 18 visits are planned for the second half of the
year. Self-assessments are being prepared by some 10 OFCs; at least seven of these are likely
to have been completed by the end of the year. One stand-alone Fund assessment report has
been completed, reports for two other OFCs are in preparation, and a total of seven of these
assessments are expected to be completed by year-end. The FSAP schedule for 2002 also


                                                 11
includes some small states. It is planned that the OFC assessment program will take place
over a three–year period.

54.    In the context of the OFC assessment exercise (and the FSAP), the Fund will also
provide assistance to the OFCs (and other countries) that have been listed by the FATF as
―non co-operative‖ in the international fight against money laundering. A limited role for the
Fund in this area, consistent with its core mandate, was approved by the Executive Board in
April 2001.

55.    The Fund has also made a special effort to secure the participation of OFCs with large
external positions in its Coordinated Portfolio Investment Survey (conducted by the Statistics
Department), through an outreach program which included visits to selected OFCs and two
seminars (arranged with financial assistance from Japan); the first seminar was hosted by the
Cayman Islands Monetary Authority.

56.     In the area of statistics, the Fund's General Data Dissemination Standard (GDDS)
provides a framework for small states to strengthen their statistical capacities. The Statistics
Department of the Fund has adapted the full GDDS to the special circumstances of small
states and provided active assistance in the implementation of this system in the small states
in the Pacific and to the Caribbean, on a regional basis, in conjunction with the Eastern
Caribbean Central Bank (ECCB). The ongoing work on the Coordinated Portfolio Investment
Survey, mentioned above, is another area where the Statistics Department has been actively
involved with small states for some time.

57.     In the Eastern Caribbean region, the Fund has been working with the ECCB,
Organisation of Eastern Caribbean States, World Bank, and United Nations Development
Programme (UNDP), on a regional statistics project in the context of a broader effort to
strengthen the macroeconomic policy-making framework in the member countries of the
Eastern Caribbean Currency Union. That effort continues to involve close collaboration and
assistance from the Fund's country economists on policy design and analysis. Fund staff
members held two short workshops on financial programming, and one longer one, at the
ECCB in 2001.

58.     As regards regional co-operation, the provision of technical assistance to the small
states of the Pacific (by the Fund and UNDP) has benefited greatly from the operations of the
Pacific Financial Technical Assistance Centre (PFTAC), whose activities are coordinated by
the Fund and now financially supported by the Asian Development Bank, Australia and New
Zealand. The Fund has also intensified its focus on the small island member countries of the
Pacific. As part of an effort to strengthen surveillance practices for these countries, Fund staff
attended the ministerial meeting of the South Pacific Forum countries, in June 2001, and
conducted a half-day workshop on fiscal issues for the ministers. Earlier in the year, the Fund
participated in a conference on ―Financial Sector Stability‖, held in Apia, at which staff
presented a paper on ―Macroeconomic Policy and Financial Sector Stability in Pacific Island
Countries.‖ In contrast to the Pacific and Caribbean, small states in Africa are scattered
across the region without any ―natural‖ sub-regional bonds or institutional structures. At a
meeting for representatives of African small states held by the World Bank on the occasion of
the African Development Bank‘s 2001 annual meeting, in Valencia, Spain, they expressed
concern about not receiving the focused attention given by the international community to the
small states in the two sub-regions.



                                                 12
59.     The establishment of the Caribbean Technical Assistance Centre (CARTAC) was
spurred by the favourable experience with the PFTAC in Fiji, and was part of a broader
strategy to enhance the policy dialogue between the Fund and the Caribbean countries.
CARTAC will focus its activities around the three core areas of Fund expertise, including
through training courses and seminars. Its activities are also co-ordinated by the Fund and
supported financially by Canada, the United Kingdom, the Inter-American Development
Bank and the World Bank. CARTAC began its operations on September 1 of this year, with a
contingent of five resident experts.

60.     The wider "Caribbean Initiative" of which CARTAC is part, was launched by the
Fund in 1999; it includes expanding surveillance, deepening research on regional issues, and
establishing closer collaboration between the Fund and the regional institutions. In this
regard, the Fund expects to conduct a consultation with the CARICOM Secretariat in the
early part of next year and to include the Organisation of Eastern Caribbean States (OECS)
Secretariat in its consultation with the Eastern Caribbean sub-region. In March 2001, the
Fund participated in a conference in St. Kitts on ―Financial Globalisation: Issues and
Challenges for Small states‖, at which staff presented a paper on ―Currency Arrangements in
Small states.‖

61.     In the area of regional surveillance, a Fund staff report on the ―West African
Economic and Monetary Union, Recent Economic Developments and Regional Policy Issues
in 2000, was issued in August of this year for discussion by the Executive Board. A similar
report on the Central African Economic and Monetary Community was discussed by the
Executive Board in April 2001. A staff report on the ―Eastern Caribbean Currency Union,
Recent Developments and Main Regional Policy Issues, was issued in February 2001. These
reports all make specific macroeconomic policy recommendations to the regional authorities.

62.    As this brief overview makes clear, the Fund has been actively involved with its
small-state members, and it will continue to be actively involved as the new architecture of
the international financial system develops. Modalities of the Fund‘s involvement will
continue to be adapted to reflect the implications of globalisation and the changing needs of
its members.


       IV.     UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

63.     The implementation of the recommendations of the Joint Task Force by UNCTAD is
being undertaken within UNCTAD‘s distinct mandates that deal with technical assistance and
support to the 31 Small Island Developing States (SIDS) and the five Least Developed Small
Continental States. Thus, although the notion of small states is not officially dealt with as a
distinct category by the United Nations, most of the small states covered by the Task Force
fall under special mandates of UNCTAD and receive considerable attention in its work
programme.

64.     Since the publication of the Task Force Report, UNCTAD has undertaken activities in
support of SIDS as a group of countries in assisting in follow up on various mandates within
the United Nations system. It has undertaken research and analysis of a range of global issues
that has contributed to the negotiating position of small states; and provided technical
assistance to countries individually and collectively, particularly in the area of trade policy
and improving the efficiency of trade regimes.


                                                13
65.   Within the United Nations system, UNCTAD has undertaken a number of activities to
complement the United Nations Secretariat in supporting the implementation of the Barbados
Programme of Action. Effective implementation of the Programme would benefit all SIDS.

66.    UNCTAD has also been working closely with the United Nations Committee for
Development Policy (CDP) in the triennial reviews of the list of Least Developed Countries
(LCDs). It has supported CDP members in better understanding vulnerability issues relevant
to Least Developed SIDS. This work has particularly benefited the reviews of Cape Verde,
The Maldives, Solomon Islands and Vanuatu.

67.     In the follow-up to the UNCTAD meeting, held in Bangkok, in February 2000, the
UNCTAD Secretariat has given special attention to the various concerns of SIDS and these
are being taken into account in the immediate policy guidelines that are been developed for
further UNCTAD action.

68.     The Third United Nations Conference on Least Developed Countries (LDC III) took
place in Brussels in May 2001. As a follow-up to this Conference, UNCTAD is developing a
programme of special support to Least Developed SIDS to accelerate and facilitate the
implementation of commitments made in the LCD III in the framework of the Programme of
Action for LDCs for the 2001-2010 decade. The special support is expected to benefit a
number of countries directly, including Cape Verde, Comoros, Haiti, Kiribati, The Maldives,
Samoa, Sao Tome and Principe, Solomon Islands, Tuvalu and Vanuatu.

69.    In the area of Trade, UNCTAD has been supporting SIDS members and observers of
the WTO in seeking special recognition by other members on the grounds of their structural
handicaps and vulnerability to external shocks. UNCTAD‘s research work on the SIDS has
been particularly useful in this regard. UNCTAD has also provided advice to SIDS in
formulating relevant negotiation points under the agreement on agriculture. A study by
UNCTAD was used by Dominica, Jamaica, Mauritius, St Kitts and Nevis, St Lucia, St
Vincent and the Grenadines and Trinidad and Tobago, in December 2000, for a
communication by SIDS on WTO negotiations on agriculture. Advice has also been provided
to SIDS in preparing relevant negotiating points under the General Agreement on Trade and
Services (GATS), with particular preference to the work on the tourism annex.

70.    The Alliance of Small Island States (AOSIS) has been taking common positions on
various issues in the context of different United Nations negotiations. UNCTAD has been
providing background information and analysis to the AOSIS members that have assisted
them in forging common positions.

71.    UNCTAD is undertaking a range of research and analysis of current issues affecting
SIDS. The results of this research and analysis have been used in various advocacy activities.
Current or recent work has concentrated on the following,

              The vulnerability of SIDS to external shocks. This research based on United
               Nations data is aimed at substantiating the case for a special and differential
               treatment of SIDS by the international community.

              The intrinsic handicaps of SIDS and their implications for development
               opportunities. These are periodic reviews of island specific handicaps.


                                               14
             The issue of SIDS graduation from the Least Developed Country status. The
              four countries that have been recently affected by graduation - Cape Verde,
              The Maldives, Samoa and Vanuatu - have used UNCTAD‘s work in their
              interpretation of CDP‘s review of the list of LDCs.

             Evolutions, strategies and new opportunities in the economic specialisation of
              SIDS.

             Multilateral trade liberalisation: implications for SIDS, evaluating SIDS
              relevant issues in the WTO.

             SIDS and liberalisation in agriculture - cross-country research and analysis to
              facilitate the formulation of negotiating points.

             Trade and the environment: an important relationship for SIDS - analysis of
              issues relevant to organic exports and exports based on traditional knowledge
              linked to bio-diversity.

             SIDS and liberalisation in trade in services - inventory of issues relevant to
              SIDS schedules under GATS. The background information has been used by
              SIDS in translating services development strategies into schedules of
              commitments and restrictions under the GATS.

             Promoting SIDS development through foreign direct investment (FDI).
              Analysis of issues relevant to foreign direct investment in SIDS, using the case
              studies of Mauritius and Vanuatu. In Mauritius, the case study was used in
              reformulating the investment policy. In Vanuatu, it served to enhance the
              Government‘s capacity to attract FDI.

             Trade liberalisation and regional integration efforts: cases of the Caribbean
              and the Pacific.

             The evolving relationship between SIDS of the ACP group and the European
              Union. This is a study of inventory of issues, with particular reference to
              market access. All the 31 SIDS of the ACP group are potential beneficiaries.
              The information is particularly useful in relevant technical co-operation
              activities.

72.     UNCTAD has also developed a number of technical assistance activities that have
addressed the recommendations of the Task Force. These have concentrated in the areas of
trade policy, trade promotion, investment policy and financial policy.

73.    In the area of trade policy, technical assistance has been provided on the following.

             Negotiations in the context of regional integration. UNCTAD‘s assistance
              facilitated the identification of products to be excluded from regional free-
              trade arrangements in the context of Haiti‘s accession to CARICOM.




                                               15
               Commodity trading risk management.

               Competition policy. Advisory services, sensitisation and training has enabled
                Barbados, OECS countries and Mauritius to increase their capacity to
                formulate desirable competition policies.

74.     To help SIDS to increase their trade, UNCTAD is planning a number of activities to
enhance the trade efficiency of these countries. These include a trade efficiency assessment
project which would involve assessments to provide a quantitative picture of the aspects of
the micro-economic trading environment in which greater competitiveness and efficiency
ought to be gained; a project on Automated System for Customs Data (ASYCUDA) which
involves the provision of hardware and software and training; development of Advance
Cargo Information System (ACIS); and development of Electronic Commerce and in
particular, an e-tourism project. The e-tourism project is expected to offer small tourism
enterprises a practical and inexpensive access to the global sphere of products promotion and
commercial distribution.

75.    In the area of investment policy, UNCTAD has concentrated on assisting SIDS in the
review of their investment policies and formulating future investment policies and
programmes for attracting foreign direct investment.


       V.       EUROPEAN UNION

The Continuous Involvement of the European Union in the Debate on Small States

76.    As the single major provider of grant aid to developing countries, the European Union
has been involved in the work of the Task Force on Small States from the beginning (see
Annex II). The European Union has participated in the Advisory Board of the
Commonwealth Secretariat/World Bank Task Force on Small States since its first meeting
which took place in London, in December 1998.

77.    Considering the need for exchanging ideas in the framework of such a group and the
need for preparation of the work to be done in relation with small states (in the
Commonwealth concept) and the Small Island Developing States (SIDS) - (in the United
Nations Barbados Programme of Action Concept), the European Commission created in
February 1999, an Interservices Task Team on ―Small States/SIDS‖ which had its first
meeting in February 1999. The team meets twice a year.

78.     This Task Team was created in view of the growing significance of the Small States
issues in the International Agenda and the importance for the Directorate General of
Development of the European Commission to follow-up the process for both the development
assistance issues and the Post-Lomé process.

79.     There is a need to assess the transition costs of globalisation for Small Island
Developing States as well as a need to develop an agenda to mitigate the vulnerability of
Small states, as they become further integrated into WTO and regional trade arrangements. In
this context the European Commission was fully involved in the process in which the World
Bank assumed the idea of implementing an approach tailored to the specific needs of the



                                               16
small states during the Development Committee, at the Annual Meeting, held in the Fall of
1999.

80.     In a more or less parallel process, the European Commission participated in the
United Nations Prospective Donors/Small Island Developing States meeting that took place
in New York to discuss assistance to SIDS (March 1999) in preparation of the revision of the
Barbados Programme of Action on SIDS to be approved by a Special Session of the United
Nations General Assembly, in New York, in September 1999 and financed three cluster
studies on the Caribbean, The Indian Ocean and Pacific conducted by UNEP.

81.     The European Commission also prepared two special studies: ―The European Union‘s
Co-operation with SIDS in the Framework of the Barbados Programme of Action (April
1999)‖ and ―The European Co-operation with SIDS‖ (September 1999). In addition the
Delegations of the Commission analysed the feasibility of the 312 projects presented by SIDS
along the lines of the 14 sectors listed in the Barbados Programme of Action.

82.     With those studies, European donors acknowledged that there are problems that are
island or small states specific or related to small size. However, those groups of countries are
not regarded as a specific group with a series of development issues in common, because the
groups are very heterogeneous and diverse.

83.    Discussions on the Vulnerability Index, exchange of views on the renegotiation of a
successor to the Lomé Convention, new orientations and practices for dealing with small
economies and preparations of dialogue in the small states forums are among the topics
discussed with the Commonwealth Secretariat and the World Bank in this context.

Adapting Development Policy to the Needs of Small Economies

84.     It has been always difficult to try to concentrate international attention on the small
states and the SIDs because of their higher levels of income, even if the ―vulnerability‖
concept was increasingly accepted by the main development partners. In this context, the
European Union has reaffirmed its attachment to take into account the vulnerabilities of
Small, Landlocked and Island ACP Countries.

85.    At present, the European Union recognises the need to take into consideration the
requirements of the small economies as they adapt to global developments and the economic
and trade globalisation processes, while ensuring consistency with the WTO. Globalisation
and technological change are challenging processes from which the small economies risk
being excluded. The increase in private flows to emerging markets has largely by-passed
them, except in the tourism sector.

86.     The need for increased efficiency and impact of foreign aid has been an important
aspect that has led to reforms agreed in the New ACP-EU Partnership Agreement signed in
Cotonou on 23 June 2000. Subsequently, the Commission proposed new guidelines for the
Community‘s Development Policy which were endorsed by the European Union‘s
Development Council of Ministers, in November 2000.




                                                17
The Small Economies and the New Development Policy 2000-2001

87.    The main objective of Community development policy, according to the orientation
defined, in November 2000, and now in the process of implementation, must be too reduce,
and, eventually, to eradicate poverty. This objective entails support for sustainable economic,
social and environmental development, promotion of the gradual integration of the
developing countries into the world economy and a determination to combat inequality.

88.    The interest of this new 2000-2001 approach for small states is the fact that poverty is
defined not simply as a lack of income and financial resources, but also as encompassing the
notion of vulnerability and such factors as no access to adequate food supplies, education and
health, natural resources and drinking water, land, employment and credit facilities,
information and political involvement, services and infrastructure. In fact, many of those
elements are needed to enable disadvantaged small states to have control over their
development, enjoy equality of opportunity and live in a safer environment.

89.    In the new European Commission approach it is also important to prevent developing
countries from becoming further marginalized through their non-involvement in the
emergence of a world-scale information society.

90.     In reply to the concern of small states to maximise the impact of the Community
development assistance, the new European Union strategy is to concentrate in a limited
number of areas for which Community action provides added value: link between trade and
development, support for regional integration and co-operation, support for macro-economic
policies, transport, food, security and sustainable rural development and institutional
capacity-building, particularly in the area of good governance and the rule of law.

91.    In the new approach, the questions of co-ordination between the Community and the
Member States and between the Community, the Member States and other donors, as well as
coherence between the various community policies, are clearly emphasised.

The Small Economies and the New ACP-EU Relations

92.     The new 20-year ACP-EU Partnership Agreement signed in Cotonou and presently in
the process of ratification, recognises also vulnerability as a criterion for a bonus to be
applied when defining the financial support to be given to every single ACP country. The
Community will increase annual flows of commitments and payments to developing
countries considering the commitment to mobilise the remaining balances of the previous
European Development Funds (EDF) (€9.5 billion), plus the new EDF resources (€13.5
billion) and the European Investment Bank own resources (€1.7 billion). Such a commitment
entails an in-depth reform of procedures and implementation modalities. The poverty focus
prevents some small states from seeing increases in their respective financial envelopes.

93.     The negotiations for the setting of the trading arrangement based in the establishment
of ―Economic Partnership Arrangements‖ would start by September 2002 in view of the new
trading arrangements to enter into force by 1 January 2008 within a 12-year transitional
period for the liberalisation of trade, in terms of reciprocity.




                                                18
94.    This approach that will lead to a fully WTO-compatible regime, should facilitate
questions of great importance for the integration of the small states in the world economy:
lower and more competitive and stable internal prices, Standardisation and Certification,
Sanitary and Phyto-Sanitary measures and other elements presently discouraging foreign
investment.

95.     Concerning the new Cotonou ACP-EU Partnership Agreement, it is also necessary to
underline that the different financial instruments have been regrouped and rationalised
through two instruments - one envelope for providing grants, and one for providing risk
capital and loans to the private sector. This rationalisation follows the line requested by small
states who complained that, in the past, each EDF has been divided into several instruments.
Each instrument functioned according to its own logic and was subject to its unique set of
procedures, thus the dialogue between the European Commission and the partner country
fragmented, created administrative problems for small states with a limited number of civil
servants.

Harmful Tax Practices

96.     In accordance with its responsibilities as a full member of the Development
Assistance Committee of the OECD, the European Commission has offered technical
assistance to small countries designed as ―non co-operative ― by the Group of International
Financial Action of OECD to make the required regulatory changes adjusting tax laws that
related to offshore and onshore companies doing business in small states. This question was
particularly discussed during the Conference ―Financial Globalisation: Issues and Challenges
for Small States‖ organised by the Eastern Caribbean Central Bank (St Kitts and Nevis) and
the World Bank in March 2001.

97.     The European Commission has already committed €4 million from the Regional
Envelope of the 8th EDF for the Caribbean Anti-Money Laundering Programme to provide
technical assistance and training to members of the Caribbean Financial Action Task Force in
their anti-money laundering efforts together with the United Kingdom and United States of
America.

Other Issues

98.     Following the discussions during the Prague First Annual Small States Forum, the
European Commission has continued regional and national efforts for combating drug
trafficking, sought to ease the transition to the new WTO Compatible Banana Regime on the
part of the Windward Islands and other suppliers, and provided emergency aid to small states
affected by natural or man-made disasters.

99.    As the host of the Third United Nations Conference of the Least Developed Countries
(Brussels, May 14-20 2001), the European Union is particularly committed to the application
of the Programme of Action for the Small states included in the list of the 49 Least
Developed Countries.

100. In the context of the preparations for the Monterrey Conference for Financing for
Development (March 2002) and the Johannesburg World Summit on Sustainable
Development (September 2002), special attention will be paid to the position of the Small



                                                19
States and the SIDS in their efforts to advance sustainable development in a context of
economic, ecological and social vulnerability.

101. The Johannesburg Summit on Sustainable Development (Rio+10) is specially
important for Small Island States. This summit hopes to reinvigorate commitments to the
issue of sustainable development established within Agenda 21 and the SIDS Programme of
Action adopted at the 22nd United Nations General Assembly Special Session held in New
York in September 1999.

102. The European Union Delegation on Small Island Developing States are instructed to
bear in mind this Programme of Action orientations during the negotiations with partner
small countries, to establish the line of community development actions at global, regional
and national levels.


       VI.     WORLD TRADE ORGANISATION

103. The WTO participated in the deliberations of the Task Force and provided a
framework for its work. At the time of Reporting, the issue of small economies in the global
trading system remains a live one in the WTO. Proposals for a work programme on small
economies are actively under consideration by members in the WTO.

104. There has been a certain degree of support for a work programme on small economies
provided that this does not lead to a new category of developing countries under WTO rules.
The WTO hopes that this will give positive results at the forthcoming Doha Ministerial
Conference. In the meantime, the WTO is seeking to ensure that the Smaller WTO members
are able to participate as fully as possible in the work of the organisations and that their
interests are taken care of. It envisages an ―issue based approach‖ in which particular
concerns of small economies are highlighted in the various WTO Agreements and solutions
found.


       VII.    ASIAN DEVELOPMENT BANK

105. The Charter of Asian Development Bank (ADB) calls for the Bank to give special
attention to the needs of the smaller or less developed countries. ―Small states‖ members of
the Bank include eleven of the twelve Pacific Developing Member Countries (PDMCs)
which are soon to be joined by East Timor as well as Bhutan and the Maldives.

106. Small states are entitled to assistance from ADB, prepared in accordance with ADB‘s
annual cycle of project preparation. In this category, ADB provides assistance to its 12
PDMCs, including Cook Islands, Fiji Islands, Kiribati, Marshall Islands, Federated States of
Micronesia, Papua New Guinea, Nauru, Samoa, Solomon Islands, Tonga, Tuvalu and
Vanuatu and Maldives. ADB engages in a wide range of social and economic development
activities aimed at improving the welfare of the people of the region. Its overarching strategic
objective is to reduce poverty. In all its work, ADB seeks to encourage the private sector,
strengthen public sector management capacity, develop human resources and help manage
natural resources sustainably.




                                                20
107. To promote investment of public and private capital for development purposes, ADB
makes loans and equity investments. It offers a range of lending modalities. Most ADB loans
are to the private sector and are for specific projects, but ADB also provides technical
assistance for the preparation and execution of development projects and programs, and for
advisory purposes. It pays special attention to the needs of smaller or less developed
countries, and gives priority as well to projects and programmes that promote regional co-
operation and contribute to the harmonious economic growth of the region as a whole.
Further, ADB promotes regional co-operation in the 12 PDMCs.

108. ADB policies and procedures are continuously being updated in an effort to better
serve member countries. Relevant current reviews include the drafting of new policies with
respect to the operations of Resident Missions, performance-based lending, and the
preparation of a new regional strategy for the PDMCs. The new Pacific Strategy titled ‗A
Pacific Strategy for the New Millennium‘ was discussed by the ADB Board in March 2001.
The strategy is now being implemented.

109. ADB is reviewing the need for a stronger presence in developing member countries,
increasing the number, strength and responsibilities of resident missions. This is likely to lead
to a greater ADB presence in borrowing-member countries consistent with what is practical.
The review of the ADB resident mission policy in the Pacific is evolving and results of the
review are expected in due course.

Performance-Based Lending

110. ADB is reviewing the means to adopt a performance-based allocation of Asian
Development Fund (ADF) resources. Although performance-based lending has been
endorsed in principle, the means to adopting this approach has not yet been approved. ADB
Board approved a policy for allocating ADF resources based on country performance,
evaluated in terms of policy adoption and implementation, needs as measured by per capita
gross national product and population size. Implementation of the policy started in 2001,
which is the first and transition year. In the review, the needs of small states will be taken into
account.

111. A factor that has a bearing on a country‘s need for development assistance is
population size. At one level, this is straightforward; the larger the population, the higher the
total allocation. However, small countries merit special attention. The underlying rationale is
that many of them, especially the PDMCs, suffer from structural vulnerability to shocks. The
sources of vulnerability include high exposure to external economic forces, remoteness, and
proneness to natural disasters. Here, the smaller the population, the larger the allocation on a
per capita basis. This is in consonance with ADB‘s charter mandate.

112. Second, country size matters. The formula should ensure that the larger the
population, the larger the allocation on an absolute basis and the smaller the allocation on a
per capita basis. However, large allocations to big countries may crowd out small countries.
In ADB‘s context, three DMCs account for 82 per cent of the total population with ADF
access, Hence, there is a need to moderate the effect of population in the allocation formula.
The formula must build in what is referred to as the small country bias.

113. Third, the formula must respond to needs. The poorer the country, the larger the
resources that ought to be made available, other factors being the same. This calls for an


                                                  21
inverse relationship between allocation and per capita GNP (GNPC). Excluding the PDMCs
that have relatively high per capita incomes, there is a wide range of per capita incomes
among ADF recipient countries. GNPC levels range from $210 (Nepal) to $1180 (Maldives).
Hence, overemphasis on GNPC can distort the allocation of resources among ADF recipients.
While the formula must indeed retain the poor country bias, it needs to be carefully
calibrated.

114. A project or programme has to have a certain minimum size to have any development
impact. Application of the allocation formula to the PDMCs along with the other larger
DMCs can result in allocations to the PDMCs as a group and individually that are too small
to be operationally meaningful. It is, therefore, proposed that PDMCs be treated as a distinct
category. A specific amount could be set apart for this category, and the formula, or a variant
thereof, applied to obtain relative shares of countries. Further, efforts will be made to adapt
and/or develop indicators of structural vulnerability as determinants of allocation for small
countries.

Regional Strategy for the PDMCs

115. ADB plays a lead role in providing advice and assistance to many of the small states
that are its members. For instance, in the 1990s, ADB played an important role in economic
and public sector reform in the PDMCs. The assessment of ADB assistance to reform efforts
in six PDMCs (Cook Islands, Marshall Islands, Federated States of Micronesia, Samoa,
Solomon Islands and Vanuatu) was undertaken and the results are detailed in the publication
titled Reforms in the Pacific. ADB continues to assign high priority to reforms in its
developing member countries (DMCs).

116. ADB is currently updating its regional strategy for the Pacific. An initiating paper for
the new strategy has been prepared and this is now subject to internal discussion. The paper
proposed that across all Pacific DMCs, the cornerstone of the strategy will continue to
support economic reform in the areas of economic policy, public sector management, and
governance. In this regard, and given the large need for capacity building, the technical
assistance function will continue to have greater importance than resource transfers in ADB‘s
assistance mix. The new Pacific Strategy has been discussed by the ADB Board in March
2001 and is under implementation.

117. In line with ADB‘s adoption of poverty alleviation as its overarching objective, a
larger proportion of ADB resources and assistance is proposed to be shifted to the Melanesian
countries (Papua New Guinea, Solomon Islands, Vanuatu) and East Timor, where both
poverty and population in the Pacific are concentrated. The thrust of poverty alleviation
assistance will be on expanding access in rural areas (and by women and children) to basic
health and education, including non-formal education. This assistance could also include
support for transport infrastructure (to improve access to disadvantaged regions) and for
capacity building of local governments. ADB assistance will also seek to reduce high
population growth rates in these countries. The Melanesian PDMCs are resource rich, but
relatively poor with high population growth rates. This strategy will support a focus on
governance, public sector reform and poverty reduction through investments in the social and
infrastructure sectors. The role of women will be particularly supported.

118. In the small, isolated and vulnerable atoll economies a special concern is the
sustainable financing of essential services. Accordingly, ADB will seek to establish and


                                                22
expand trust funds, in collaboration with other donors, to finance recurrent expenditures.
Given the limited scope for growth in these economies, ADB will explore opportunities for
marine resource development, niche-market tourism support and skills development for
labour export. The island atoll PDMCs (Kiribati, Marshall Islands, Nauru and Tuvalu) are
severely disadvantaged by their smallness, isolation and weak resource base. The strategy
will support (a) establishing and expanding Trust Funds to support the sustainable financing
of basic services and (b) support exploitation of niche markets for tourism and sustainable use
of marine resources.

119. The more economically advanced PDMCs (Cook Islands, Federated States of
Micronesia, Fiji Islands, Samoa and Tonga) have a higher skill base, moderate resource
potential and relatively low poverty. The strategy will focus on promoting private sector
growth through policy reform and physical and financial sector strengthening, including
support for tourism-related infrastructure.




                                                23
                                                                                                    ANNEX I

                             SMALL STATES AGENDA
                     WORLD BANK GROUP PROGRESS REPORT 2001


I.       INTRODUCTION

1.       In follow-up to the April 2000 Small States Joint Task Force report and the World
Bank‘s framework of assistance for small states, this note provides an update on World Bank
activities aimed at helping small states meet their development challenges. 3 This update also
follows on the Bank‘s September 2000 progress report included in the First Annual Small
States Forum Background Information Document.4 The update is structured similarly to the
first progress report: Section II focuses on relevant operational activities in each area of the
Bank‘s framework of assistance for small states; Section III discusses small state country
programmes; and Section IV offers some conclusions. The update concentrates on activities
that have taken place over the Bank‘s past fiscal year (July 1, 2000—June 30, 2001), plus
some activities that are currently underway or planned for the near future.


II.      UPDATE ON WORLD BANK FRAMEWORK OF ASSISTANCE

2.      The World Bank‘s framework of assistance for small states outlines seven areas of
activity:
            Reducing transactions costs for small states and donor coordination.
            Supporting regional initiatives.
            Lowering the costs of natural disasters and improving risk management.
            Supporting private sector development.
            Assisting in exploiting opportunities that information technology and
             electronic commerce can bring to small isolated states.
            Protecting the physical environment, and
            Facilitating knowledge sharing. 5

A.       Reducing Transaction Costs for Small States and Donor Coordination

3.      At the 2000 Annual Meetings a workshop was held to discuss how to enhance the
effectiveness of donor assistance to small states.6 Over the past year, work on addressing this
problem has progressed. During preparation of the Bank‘s 2001 Country Assistance Strategy


3
          See Small States: Meeting Challenges in the Global Economy, Report of the Commonwealth
Secretariat/World Bank Joint Task Force on Small States, April 2000, accessible at
www.worldbank.org/smallstates.
4
          See First Annual Small States Forum: Background Information, September 25, 2001, accessible at
www.worldbank.org/smallstates.
5
          The mapping of these seven areas into the four broad action areas of the Task Force report is shown in
the First Annual Small States Forum Background Information Document, page 2, cited above.
6
          See First Annual Small States Forum: Summary, September 25, 2001, accessible at
http://www.worldbank.org/smallstates.


                                                         24
(CAS) for the Eastern Caribbean sub-region,7 the Bank, in collaboration with the Eastern
Caribbean Central Bank and the Organization of Eastern Caribbean States (OECS)
Secretariat, helped convene sub-regional aid coordination meetings in March and May 2001.
Following successful exchanges, participants expressed an interest in holding such meetings
on a twice-yearly basis, as a key building block of the effort to coordinate specific external
assistance programmes. As part of this effort, the Bank will take the lead in preparing an
analysis of external assistance to the sub-region, to be presented at the next aid coordination
meeting planned for fall 2001. In the Pacific region, donor cooperation took another step
forward with the presentation of the report, ―Harmonizing Donor Policies and Practices in the
Pacific,‖ at the June 2001 Pacific Islands Forum Economic Ministers Meeting (FEMM).8
The report devised a menu of policy, institutional, programming, and operational options for
harmonization between Australia and New Zealand. Australia‘s Agency for International
Development and New Zealand‘s Ministry for Foreign Affairs and Trade plan to engage
selected Pacific Island governments in identifying options that may improve donors‘
development effectiveness in their countries. The Bank presented a draft of its West Africa
regional integration strategy at a workshop hosted by the Government of Mali in March 2001
(more information on the strategy follows). At the workshop, which brought together country
representatives, officials from regional organizations, major donors, and members of the
private sector and civil society, a proposal was formulated to establish a broader consultative
forum with the aim of bringing together on a regular basis donors and their major West
African interlocutors. Such a forum would be more comprehensive than the various
collaborative arrangements that currently exist, and its focus would be to enhance donor
coordination and collaboration.

4.     Broader Harmonization Agenda. In recognition of the significance of donor
coordination the Bank‘s Development Committee requested a report summarizing donor
experiences in harmonization.9 The report, discussed during the April 2001 Spring Meeting,
includes specific information on activities in small states, and the first progress report, to be
discussed by the Development Committee in September 2001, contains an update on progress
in small states.10 At their April discussion, Ministers concluded that accelerated progress on
harmonization is needed, and that priorities for attention include procurement, financial
management, and environmental assessment.11 The Committee emphasized that
harmonization must be premised on building recipient capacity, and endorsed the report‘s
recommendation that harmonization should be aimed at developing a framework of
appropriate common standards or good practice principles around which recipient capacity
and recipients‘ systems may be built that donors can rely on. In response - and in conjunction
with ongoing efforts aimed at improving donor coordination - the Bank has defined a time-
bound action plan jointly with other bilateral and multilateral donors to implement identified
harmonization initiatives, including those of significance to small states. This includes

7
         See Eastern Caribbean Subregion: Country Assistance Strategy (Report No. 22205-LAC; R2001-
0105), June 4 2001, accessible at http://www.worldbank.org/cas.
8
         See Harmonising Donor Policies and Practices in the Pacific, Report of the Joint Australia–New
Zealand Research Project, March 2001 (study commissioned by the Australian Agency for International
Development and the New Zealand Ministry for Foreign Affairs and Trade).
9
         See Harmonization of Operational Policies, Procedures and Practices: Experience to Date (DC2001-
0006), April 13, 2001, accessible at http://www.worldbank.org/devcom.
10
         See Harmonization of Operational Policies, Procedures, and Practices: First Progress Report,
submitted for consideration of the Development Committee at its meeting on September 29, 2001, to be
accessible at http://www.worldbank.org/devcom.
11
         See Development Committee Communiqué, April 30, 2001, available at
http://www.worldbank.org/devcom.


                                                     25
initiatives aimed at harmonized approaches to financial reporting and auditing of projects
and, in follow-up to the standardization of the master bidding document for supply of goods,
standardization of other master documents for international competitive bidding. Regular
progress reports on this topic will be presented to the Development Committee.

5.      Flexible Instruments. In last year‘s progress report we highlighted adaptable
programme loans (APLs) and learning and innovation loans (LILs) as a way for small states
to cut transaction costs of accessing Bank assistance due to the streamlined processing and
approval procedures of these instruments. They are proving popular with small states. APLs,
which provide phased support for long-term development programmes through a series of
loans that build on lessons learned from previous loans in the series, accounted for half of the
operations approved for small states in the past fiscal year (more information on lending
approvals is provided in Section III). This included the School Access and Improvement
Programme in Djibouti and ―horizontal‖ APLs for HIV/AIDS prevention and control
programmes in Barbados and The Gambia (part of wider HIV/AIDS programmes for the
Caribbean and Africa regions, respectively).12 The second phase of the horizontal OECS
Disaster Management APL was initiated with the approval of support for Grenada. A LIL, a
small pilot-type investment that might be used as a basis for a larger lending programme, was
approved for Vanuatu in the education sector. The project aims to identify replicable model
of instruction in vernacular languages, English, and French in rural areas.

B.       Supporting Regional Initiatives

6.      As the Task Force report emphasized, regional cooperation is an important way for
small states to tackle some of the development challenges they face. Regional approaches
also help to reduce the costs of accessing donor assistance, encourage donor coordination,
and compensate for small states‘ limited institutional and human resource capacity. Bank
support for regional approaches has been articulated recently in regional strategies. The Bank
formulated its first regional strategy for nine Pacific Island member countries last May; as
mentioned above, a strategy for the Eastern Caribbean sub-region was completed in June of
this year; and the Bank completed its first West Africa Regional Integration Strategy this
August.13 The Bank‘s activities in the Pacific region, as outlined in the strategy, include
lending to the larger Pacific member countries, complemented at the regional (and country)
level by the Bank‘s role as a provider of global knowledge. One manifestation of regional
knowledge provision is the 2000 Pacific Regional Economic Report, which analyses the
interrelated challenges confronting Pacific Islands in the areas of urbanization, management
of ocean resources, and climate change adaptation, and offers recommendations to assist
these small states in responding to the challenges.14 The Bank has also broadened its
regionally focused involvement through work on non-communicable diseases, in partnership
with the Secretariat of the Pacific Community, and on the role that education systems can
play in the promotion of social tolerance in the Pacific. Key regional activities proposed in
the Eastern Caribbean strategy include a subregional approach to the regulation and
12
         Normally an APL phases an operation in a single country; a horizontal APL, by contrast, takes a
multicountry approach. In a horizontal APL, the phases correspond to the sequenced inclusion of each new
participating country. While the focus of the overall program is the same in each country, each can tailor its own
subproject to national needs.
13
         See Pacific Regional Strategy (Report No. 20370-EAP), May 2000; and Eastern Caribbean Subregion:
Country Assistance Strategy, op. cit., accessible at http://www.worldbank.org/cas; and West Africa: Regional
Integration Assistance Strategy (Report No. 22520-AFR; IDA/R2001-0132), July 11, 2001.
14
         See Cities, Seas, and Storms: Managing Change in Pacific Island Economies, November 13, 2000,
accessible at http://www.worldbank.org/eap.


                                                         26
supervision of telecommunications, power, and water and sanitation; a coordinated
subregional framework for environmental management; a Financial Sector Assessment
Programme for the OECS; and continued regional analysis, for example, a study on youth
and social development. Also, to help build capacity for economic and financial management,
a Caribbean Regional Technical Assistance Centre, to be managed by the IMF with support
from the Bank and other donors, will be established in Barbados in September 2001. The
West Africa Regional Integration Strategy proposes to assist the fifteen countries - including
three small states: Cape Verde, The Gambia, and Guinea-Bissau - of the Economic
Community of West African States in their regional integration efforts. Bank assistance will
focus on facilitating macroeconomic convergence, market integration (including common
trade policies), and human and institutional capacity building. The strategy proposes support
for integration and strengthening of regional air transport and financial systems, sub-regional
electricity and natural gas markets, and eventually help to establish a regional
telecommunications market and regulatory system.

C.      Lowering the Costs of Natural Disasters and Improving Risk Management

7.      As the Task Force report noted, many small states are located in areas subject to
natural disasters and can be disproportionately affected by such events. The Bank‘s work on
reducing the costs of natural disasters and improving risk management is advancing in the
Caribbean region, with the further development of the regional catastrophe risk management
and insurance project. Project components include strengthening the insurance sector and its
regulatory/supervisory function; designing and implementing a sub-regional catastrophe
insurance fund to protect government assets and infrastructure; and examining housing
micro-credit, micro-insurance, and slum upgrading schemes to protect lower-income
communities. So far, six countries have confirmed their participation in the project, which
will be co-financed with the Caribbean Development Bank, and another five countries are
expected to participate. An August 2001 project workshop aimed to formalize project
management and oversight arrangements ahead of appraisal, which is expected in December
2001. Adapting catastrophe risk insurance approaches to the Pacific was a topic at the June
2001 FEMM. A pilot study of hazard and disaster events in a major Pacific urban center (Port
Vila, Vanuatu) will form the basis for the development of a full risk exposure model for the
wider region. Results of the study (expected by January 2002), and the applicability of
catastrophe insurance as part of a comprehensive Pacific disaster management strategy, are to
be discussed at the FEMM in 2002.

8.      Disaster Management. The Bank‘s Disaster Management Facility (DMF) also
continues its work to integrate disaster prevention and mitigation measures into Bank
programmes and projects. As a central unit within the Bank, the DMF provides technical
assistance to operational staff and promotes the inclusion of risk analysis and management in
Bank operations, economic and sector work (ESW), and CASs (more information on ESW is
provided in Section III). DMF activities and those of the ProVention Consortium - a global
coalition of governments, international organizations, academic institutions, and private
sector and civil society organizations aimed at making disaster prevention and mitigation an
integral part of development - address the components of a comprehensive risk management
strategy.15 This includes identifying hazard and risk exposure, reducing identified risks, and
implementing mechanisms to transfer or share the risks that cannot be reduced. The DMF and

15
         More information on the ProVention Consortium is accessible at
http://www.proventionconsortium.org.


                                                      27
partner organizations are also carrying out case studies of the economic impacts of natural
disasters. The first study was conducted in Dominica and should be publicly available on the
DMF website by October 2001.16 A study on the links between environmental management
and disaster management in the Dominican Republic, Dominica, and St. Lucia is also under
preparation. The Bank‘s Caribbean country unit also proposes to undertake a study of the
economic benefits of reducing vulnerability to natural disasters and to make
recommendations at the country and regional level to improve disaster management. The
study is expected to be presented at the June 2002 Caribbean Group for Cooperation and
Economic Development meeting.

9.      Commodity Risk Management. As discussed in the Task Force report, many small
states are heavily exposed to volatile international commodity markets. The International
Task Force (ITF) on Commodity Risk Management in Developing Countries, convened by
the World Bank in 1999, has proposed a market-based commodity price insurance scheme to
assist developing countries better manage vulnerability to commodity price fluctuations. 17 By
bringing together producers/consumers in developing countries and international providers of
price insurance services in the private sector, the ITF proposal would enable small scale
producers to receive market-based compensation in the event of low export prices or high
import prices within a given time horizon. The ITF has developed four prototype test cases to
gauge the feasibility of the proposal. Initial reports from the cases indicate that the conceptual
framework is sound, and that there are an array of potential commodity sectors in several
developing countries that may benefit from an effective programme of commodity price risk
insurance. Direct benefits to producers with marketable surpluses might come from improved
access to credit, and/or credit at better terms, and indirect benefits may accrue to the very
poor landless who may benefit from enhanced employment security if farm owners have
higher certainty of future farm revenues. The ITF will continue to expand the portfolio of
case studies and develop additional case studies - including in some small states - to create a
larger and more diverse pipeline by June 2002. The group is also developing an operational
framework that can efficiently and rapidly provide the services of an honest broker for
delivery of price insurance instruments to developing countries on a trial basis.

D.      Supporting Private Sector Development

10.     The Bank catalyses the private sector in small states through its lending and analysis,
and through joint activities with the International Finance Corporation (IFC), which finances
private sector ventures in developing countries.18 IFC approved ten projects for small states
over the past fiscal year, in Belize, Botswana, Cape Verde, Cyprus, Estonia, Fiji, Maldives,
Seychelles, and Trinidad and Tobago. IFC also has previous commitments in nine more small
states - Barbados, Gabon, The Gambia, Guinea-Bissau, Guyana, Mauritius, Samoa,
Swaziland, and Vanuatu. IFC‘s commitments cover a range of activities, including financial
market development, tourist enterprises, food and agribusiness, manufacturing, and the health
sector. The joint Bank-IFC Africa and South Pacific Project Development Facilities and the
Foreign Investment Advisory Service (FIAS) also continue to be active in small states.19
FIAS‘s recent work in the Pacific includes advice on Duty Suspension Assistance in Fiji, an
investment seminar and assistance to prepare drafting guidelines to amend legislation in

16
        The DMF website is accessible at http://www.worldbank.org/dmf.
17
        More information on the ITF is accessible at http://www.worldbank.org/commrisk.
18
        More information on IFC is accessible at www.ifc.org.
19
        More information on the Project Development Facilities is accessible at
www.ifc.org/products/services/services.html. More information on FIAS is accessible at www.fias.net.


                                                       28
Kiribati, and foreign direct investment legislation assistance in Marshall Islands, Federated
States of Micronesia, Palau, Samoa, Tonga, and Vanuatu. FIAS also undertook an assessment
in Guinea-Bissau in support of a proposed private sector development project that aims to
remove barriers to trade and support the government‘s privatisation plan. At the request of
the Bhutan government, the Bank is currently undertaking a private sector survey to explore
increased private sector participation in that country‘s development.

11.     Rapid Response Advisory Services. The joint Bank-IFC private sector unit also
launched in April 2001 a Rapid Response Website.20 It is designed to provide a window into
the knowledge resources and advice of Bank/IFC experts on such core private sector
development policy issues as economywide interventions shaping the investment climate;
private participation in sectors with complex market design and regulatory issues (e.g. water,
telecommunications, health, and education); privatisation transactions and policy; and output-
based aid (i.e. delivering public services through contracts with the private sector). Bank staff
working with governments on policy reform and client governments themselves can access
services, which are provided free of charge or on a fee-basis, depending on the nature of the
inquiry.

E.      Information Technology and Electronic Commerce

12.      The potential of information and communication technology (ICT) for small states
has yet to be fully exploited, but several Bank projects are developing customized approaches
in this important area. Following the Pacific Regional Strategy‘s discussion of technological
and communications advances as a potential way to reduce the difficulties associated with the
physical isolation of the Pacific Islands, a possible technical assistance loan to Samoa
focusing on ICT is under consideration. Bhutan is currently engaging the Bank to assist in
expanding its free primary education system to the secondary level, with a particular focus on
developing education in information technology. The ongoing OECS Telecommunications
Reform Project is focused on reforms in the existing sub-regional telecommunications
market, with an historic agreement in April 2001 between the OECS and Cable and Wireless
that will pave the way for full competition. Other small states are providing examples of how
to harness the power of global communications technology; Mauritius has recently moved
into software development, and a high-capacity fiber-optic cable linking Europe to Asia is to
be hooked up in the country soon; several projects are under way to develop the information
technology and telecommunications sectors in that country. Furthermore, in the context of its
updated strategy for activities in the ICT sector, which is expected to be presented to the
Board of Directors in September 2001, the Bank Group proposes to expand the number of
small technical assistance loans, such as the one to the OECS or the one under consideration
for Samoa, which have proven effective. It also proposes to support human capacity building
in ICT and the development of ICT applications for small businesses.

F.      Protecting the Physical Environment

13.     The Bank supports protection of the environment and scarce resources in small states
through projects and programmes, including activities through the Global Environment
Facility (GEF), and sectoral and regional analysis.21 A GEF Indian Ocean Islands Oil Spill
Contingency project continues to address the threat of oil spills in this region, aiming to
20
          The Rapid Response Website is accessible at http://rru.worldbank.org/.
21
          More information on GEF is accessible at http://www.gefweb.com; more information on Bank GEF
projects is accessible at http://www.worldbank.org/gef.


                                                     29
conserve globally significant marine and coastal biodiversity around Seychelles. Another
GEF programme is aimed at strengthening the coral reef monitoring network in Indian Ocean
Commission countries, including Maldives. In addition to several GEF programmes in the
Caribbean, the Bank is involved in helping OECS countries to conserve their environmental
resources through a Ship and Solid Waste Programme. The 2000 Pacific Regional Economic
Report remains relevant in its analysis of the environmental challenges facing the Pacific
Islands - including climate change - and strategies for addressing them.22

G.       Facilitating Knowledge Sharing

14.      The World Bank Institute, the Bank‘s learning arm, continues its mission to
disseminate global knowledge and expertise through on-site training courses and distance
learning activities that bring information to the clients‘ doorsteps.23 Distance learning is
carried out through the Global Development Learning Network (GDLN), a unique
partnership of public, private, and non-governmental organizations.24 The GDLN is a fully
interactive, multi-channel network with a mandate to serve the developing world. GDLN
partner organizations work together to take advantage of the most modern technology for
building local capacity, sharing learning and knowledge, and building a global community
dedicated to reducing poverty and meeting development challenges. GDLN's goal is to
establish by mid-2002 more than fifty Distance Learning Centers (DLCs). Owned and
operated by local training and educational institutions, it is through DLCs that the GDLN
delivers videoconferencing and internet-based learning activities to participants worldwide on
a year-round basis. Several LILs are piloting distance learning approaches, including the
establishment of DLCs, and successful pilots may serve as a basis for adapting the approach
in small states. This work is also supported by the above mentioned ICT strategy. In addition,
the Bank‘s Small States Website, established in advance of the 2000 Small States Forum in
Prague, has proven a valuable information resource, receiving an average of 548 hits per day
during the first half of 2001.25 The bulletin board function - set up to facilitate information
exchange among users - remains a viable tool for facilitating knowledge sharing among small
states, and the broader community interested in small state issues.

H.       Trade and Financial Sector Issues

15.    At the Development Committee‘s Spring Meeting in April 2001, Ministers
reemphasized the critical importance of trade for economic growth and poverty reduction,
and the important role the Bank, in collaboration with its partners, can play in helping
developing countries increase their ability to access global markets. 26 In order to help clients
make better use of trade and investment integration to promote growth and poverty reduction,
the Bank recognized that it had to reconstitute its trade activities to address the much larger
scope of trade-related issues brought to bear by the World Trade Organization (WTO), which
go right to the heart of development policy. The Bank is working in partnership with bilateral
donors, the United Nations Development Programme (UNDP), regional development banks,
and others on trade and development projects and studies, and has increased its own capacity
22
          See Cities, Seas, and Storms: Managing Change in Pacific Island Economies, op. cit.
23
          More information on WBI is accessible at http://www.worldbank.org/wbi.
24
          More information on GDLN is accessible at http://www.worldbank.org/distancelearning/gdln.
25
          The Small States Website is accessible at http://www.worldbank.org/smallstates. Data on the number
of hits received were reviewed for the period January–July 2001; for technical reasons, data for May 2001 were
not available.
26
     See Development Committee Communiqué, April 30, 2001, and Leveraging Trade for Development: World Bank Role
     (DC2001-0004/1), April 9, 2001, accessible at http://www.worldbank.org/devcom.


                                                        30
to address trade-related development issues. Country programmes remain the main vehicle
through which the Bank concentrates its trade assistance, and recent CASs discuss how trade
issues affect country development.


16.     Research and the Integrated Framework. The Bank has an extensive trade research
programme. Topics of concentration include the use of product standards as barriers to trade;
approaches to reforming trade and investment in service sectors; linkages between trade,
trade reform, and poverty reduction; and enhancing the capacity of developing countries to
prepare for, and participate in, WTO negotiations, especially in agriculture and services. 27 In
addition, the 2002 Pacific Regional Economic Report will focus on progress that Pacific
region countries have made in the development of a free trade agreement, and the
implications that the agreement might have for individual country reform programmes. In the
context of the re-defined Integrated Framework for Trade-Related Assistance for the Least
Developed Countries, the Bank collaborates with the International Monetary Fund (IMF),
International Trade Centre, United Nations Conference on Trade and Development
(UNCTAD), UNDP, WTO, and bilateral donors to identify and assist in meeting the trade-
related technical assistance needs of Least Developed Countries (LDCs), including small
states. Revamped in 2000, the Integrated Framework is currently working with three pilot
countries on the preparation of diagnostic integration studies, which will be used as a basis
for developing a programme of technical assistance to strengthen the overall competitiveness
of the economy and the sectors selected for more detailed analysis. The teams of local and
international experts working on the studies will hold trade-specific workshops or seminars in
the countries to discuss their draft reports with relevant parties, including the door community
and civil society, with a view to raising the profile of trade issues within the government‘s
development policies and within the context of Poverty Reduction Strategy Papers (PRSPs)
where appropriate (more information on PRSPs is provided in Section III). Over the next
three years, it is expected that the pilot studies will be extended to include small states
interested in benefiting from Integrated Framework assistance.

17.     Financial Sector Strengthening. A strong financial sector is a crucial component of
development and poverty alleviation. A strong financial sector provides a full range of
financial services to support growth; it also helps to absorb shocks that can be costly - not just
in large, emerging economies that are subject to volatility in international capital markets, but
also in small states. To promote strong financial sectors, the Bank is continuing its active
programme of assessments and follow-up technical assistance. The assessment phase - the
Financial Sector Assessment Programme (FSAP) - is a joint programme with the IMF, which
also draws on national experts. An FSAP for Gabon was completed in August 2001, and an
FSAP for the OECS is planned this fiscal year. Assessments of compliance with sound
supervisory and regulatory practices, as embodied in key international standards and codes,
are an important element of the overall assessment; and assessments of compliance with
standards and codes relevant to financial activities in offshore financial centers are one focus
of this effort. Where gaps are found to exist in the supervisory or regulatory regime, or in the
structure of the financial sector, the Bank and the IMF seek to support countries in their
efforts to address the problems. As the number of FSAPs grows, greater emphasis is being
placed on ensuring the ability to satisfy the increasing demands for follow-up technical
assistance. The Bank and the IMF are seeking financial support from donor countries, to
complement their own resources, so that such assistance can be provided. In addition, the

27
       More information on the Bank‘s trade work is available at http://www.worldbank.org/trade


                                                     31
World Bank and IMF are currently working on a proposal for a global tax network, to
provide a forum for truly global dialogue on tax matters of common interest to developed and
developing countries, including small states. The aim of this forum would be to facilitate the
sharing of experiences in the tax arena and promote cooperation and cross-fertilization to
improve the effectiveness of tax administrations and tax policy-making.


III.     UPDATE ON WORLD BANK SMALL STATE COUNTRY PROGRAMMES

18.      This section reviews recent World Bank small state CASs, lending, and ESW,
illustrating how these key activities carry out the seven themes in the Bank‘s framework of
assistance.28 It also discusses the relatively recent PRSP programme for IDA-eligible
borrowers.

A.       Country Assistance Strategies

19.     The CAS is the World Bank‘s business plan in support of a country‘s development
vision. Adopting as a starting point the country‘s own development goals, the CAS sets out
the Bank‘s diagnosis of the country situation and the Bank‘s programme of lending and
nonlending activities in support of the country‘s vision. The Bank‘s programme, designed in
collaboration with the government and other stakeholders, is tailored to the country‘s
particular circumstances and the Bank‘s comparative advantage. Over the past fiscal year, six
CASs or CAS-like documents for small states were discussed by the Bank‘s Board of
Executive Directors, including for Belize; Comoros; Djibouti; Maldives; Sao Tome and
Principe; and the strategy for the Eastern Caribbean subregion, which covers six small states
(Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent
and the Grenadines).29 This is in addition to the previously reported thirty CASs for small
states discussed by the Board between fiscal 1991-2000. Since the CAS disclosure policy
took effect in August 1998, nine of ten small states CASs subject to the policy have been
publicly disclosed.30

20.     Emphasis of Small State CASs. As in the past, the most recent batch of small state
CASs focuses on several themes related to the Task Force report agenda and the Bank‘s
framework of assistance. The CASs stress the need for institutional capacity strengthening,
human resource development, environmental protection, and donor coordination. They
highlight the importance of private sector development and the reduction of vulnerability to
external shocks, such as natural disasters and commodity price fluctuations. Because the
Bank is usually one of many development partners, individual CASs are selective in targeting
Bank support, in line with country needs and the Bank‘s comparative advantage. For
instance, environmental protection, public sector management, and education are the focus of
Bank assistance in Maldives. In Djibouti, Bank assistance helps to improve basic public
service provision, and social protection.




28
     The analysis in this section is based on the Task Force report‘s list of states with a population of 1.5 million
or less, which includes forty-one World Bank small state developing member countries.
29
          It should be noted that Antigua and Barbuda is not currently a Bank borrower; given its important
influence on the subregion‘s development agenda, the CAS also includes some discussion of Barbados.
30
          Publicly disclosed CASs are accessible at http://www.worldbank.org/cas.


                                                           32
B.      Poverty Reduction Strategy Papers

21.      In September 1999, the Bank‘s Development Committee and the IMF‘s Interim
Committee endorsed a new framework for Bank and Fund efforts to help countries achieve
sustainable poverty reduction.31 The approach, which builds on the principles of the
Comprehensive Development Framework (CDF),32 requires that country-owned,
participatory poverty reduction strategies - embodied in PRSPs - serve as the basis for
concessional lending, and for debt relief under the enhanced Heavily Indebted Poor Countries
(HIPC) Initiative.33 It is expected that after July 1, 2002, almost all CASs for IDA-eligible
borrowers would be based on PRSPs, and that these national strategies would also serve as
frameworks for other donor assistance.34 Countries may prepare Interim PRSPs (I-PRSPs),
which describe existing country development strategies using available data, to avoid delays
in accessing concessional assistance or HIPC interim relief, until a full PRSP can be
prepared. Four IDA-eligible small states -The Gambia, Guinea-Bissau, Guyana, and Sao
Tome and Principe - have prepared I-PRSPs, with full PRSPs possible in 2002. All four
countries have also reached their enhanced HIPC Decision Points and are currently receiving
debt relief under the HIPC Initiative. In addition, Djibouti is aiming to complete an I-PRSP
this fiscal year, and Cape Verde is proposing to formulate a PRSP in 2002.

C.      Lending

22.     During the past fiscal year, the Bank approved ten lending operations for nine small
states - Barbados, Belize, Comoros, Djibouti, The Gambia, Grenada, Samoa, Sao Tome and
Principe, and Vanuatu - with commitments totalling approximately $94 million. Recent
approvals range from a $3.5 million LIL (the Vanuatu Second Education Project) to a $15
million APL (the Barbados HIV/AIDS Prevention and Control Programme). Over the past
three fiscal years (FY1999-2001), the Bank averaged 12 operations of $11 million to nine
small states each fiscal year. Of the 35 operations to small states approved during FY1999-
2001, the Africa region accounted for the largest share with 16; the Latin America and
Caribbean region follows with eight; and the East Asia and Pacific region with five. As of
August 16, 2001, the Bank had 67 active operations in small states, with net commitments of
$795 million, including two operations already approved in the current fiscal year (beginning
July 1, 2001).

23.    Recently approved operations cover the range of sectors in which small state
development challenges fall:

           Public Sector Strengthening. An operation for Sao Tome and Principe is
            supporting improved public expenditure management and public administration
            strengthening, in addition to social objectives outlined in the country‘s I-PRSP. In
            The Gambia Bank support is helping to build capacity for economic policy


31
         See Development Committee Communiqué, September 27, 1999, available at
http://www.worldbank.org/devcom.
32
         Articulated by World Bank President James D. Wolfensohn in January 1999, more information on the
CDF is accessible at http://www.worldbank.org/cdf.
33
         More information on the HIPC Initiative is available at http://www.worldbank.org/hipc/.
34
                                                                                      More
information on PRSPs is available at http://www.worldbank.org/prsp.


                                                     33
              formulation and execution, including capacity building of the judicial and
              financial systems to facilitate private sector development.

             Disaster Management. The Grenada Disaster Management APL supports
              measures to strengthen institutions and infrastructure to mitigate the impacts of
              natural disasters. The programme is expected to be extended to St. Vincent and
              the Grenadines this fiscal year.

             Environment and Infrastructure. The Infrastructure, Water, and Environment
              programme in Comoros aims to improve living conditions and stimulate economic
              growth, while protecting the environment, through investments in basic
              infrastructure. The Belize Roads and Municipal Drainage Project aims to improve
              traffic flows on the national road network and national transportation policy
              coordination, plus improve natural drainage, and reduce the impact of floods.

             Health and HIV/AIDS. The Samoa Health Sector Management Programme
              supports capacity strengthening for the Department of Health in developing and
              implementing appropriate health policies, legislation, and regulation. HIV/AIDS
              programmes for Barbados and The Gambia are supporting prevention and
              mitigation measures to stem the growth of the disease in these countries.

             Education. The Djibouti School Access and Improvement Programme is
              providing assistance aimed at enhancing the quality of education and increasing
              primary school enrolment. The Vanuatu Second Education Programme tests
              whether the country can effectively deliver a package of innovations intended to
              move toward its objective of education for all. An education reform project for
              Belize is expected to go forward before the end of this year, and an umbrella
              project for the OECS, to increase equitable access to secondary education and
              improve the quality and management of public and private schools at that level, is
              under preparation.

24.     Graduation. As discussed in last year‘s progress report and in the Joint Task Force
report, eligibility for borrowing from the International Bank for Reconstruction and
Development (IBRD) and the International Development Association (IDA) - together the
World Bank - is based on several criteria: per capita income, social indicators,
creditworthiness, and economic and social policy performance. The graduation programmes
for both IDA and IBRD are flexible - to ensure that no country, including any small state, is
graduated prematurely - and decisions are reversible. In the case of Barbados, which
graduated from IBRD lending in 1993, it was judged that the above mentioned HIV/AIDS
Prevention and Control Project constituted a valid case for new IBRD lending. Special
treatment for small island economies whose per capita incomes are above the IDA-eligibility
cut-off, but whose limited creditworthiness prevents their borrowing from IBRD, will
continue through the IDA12 replenishment period (ending on June 30, 2002).35 It is expected
that the exceptional vulnerability of small island economies to external economic shocks and
disruptive natural disasters would be considered during discussions of IDA13 (which would


35
     More information on IBRD and IDA eligibility terms is available in Operations Policy 3.10, Loan Charges, Currencies,
     and Payment Terms of IBRD Loans and IDA Credits, Annex D, IBRD/IDA Countries: Per Capita Incomes, Lending
     Eligibility,            and                 Repayment                Terms,                accessible             at
     http://wbln0018.worldbank.org/institutional/manuals/opmanual.nsf/TextOnly? OpenNavigator, under Volume II,
     Contractual.


                                                             34
cover the three-year period ending June 30, 2005) and would continue to be taken into
account by the IDA Deputies in establishing eligibility for IDA.

D.     Economic and Sector Work

25.     ESW serves as a basis for the Bank‘s policy dialogue with clients, development of
country strategies, and formulation and implementation of effective lending programmes. It
also informs the international community of development challenges in a particular country
or region; and, by deepening clients‘ understanding of development issues, it serves as a
valuable tool in building local capacity. ESW is an essential part of the programme of Bank
lending and non-lending activities set out in the CAS. It provides the fundamental knowledge
needed to understand the broad social and structural constraints to sustained growth and
poverty reduction, plus the analyses of the efficiency of countries‘ public expenditures,
procurement, and financial management systems. Filling gaps in the coverage of these core
areas is a priority over the next few fiscal years, but other diagnostic ESW and country
specific ESW will also serve to underpin lending and policy dialogue in small state country
programmes.

26.     Selected recent or planned core diagnostic ESW, other diagnostic ESW, and country-
specific ESW for small states are highlighted below, demonstrating how ESW addresses
issues of importance to small states‘ development:

          Core Diagnostic ESW. Over the past fiscal year, a Country Financial
           Accountability Assessment and a Country Procurement Assessment Review were
           completed for the OECS. The reports examine inter alia capacity-building needs
           in these sectors with a view to strengthening them. Poverty Assessments planned
           for OECS countries will provide a better understanding of the nature and scope of
           poverty to better target policies for growth and poverty reduction. A Public
           Expenditure Review (PER) for the Maldives is expected to be completed this year,
           and an intensive PER is proposed for Cape Verde in 2002 to cover, in addition to
           traditional analyses related to resource use, public resource management and
           institutional organization to assist the government in improving macroeconomic
           management.

          Other Diagnostic ESW. An institutional and governance review for six small
           states of the OECS (Antigua and Barbuda, St. Kitts and Nevis, Dominica,
           Grenada, St. Lucia, and St. Vincent) is nearing completion. It examines public
           sector institutional and organizational constraints that affect these countries‘
           ability to respond effectively to challenges faced, with a view to focusing attention
           on needed reforms.

          Regional Reports. As mentioned, the 2002 Pacific Regional Economic Report
           will examine progress in implementing and implications of the Pacific regional
           trade agreement. Several Caribbean regional studies are informing, or will inform,
           national strategies and Bank and partner programmes in that region: reports on
           HIV/AIDS, tourism and the environment, and education have been completed; a
           new study on youth and social development in the region will build on a recent
           study in Trinidad and Tobago.




                                                35
            Country Specific Studies. Recent studies analyzing the HIV/AIDS epidemic in
             Botswana and Swaziland demonstrate that welfare improvements and economic
             growth in these countries will be significantly eroded due to the impacts of this
             disease.

IV.      CONCLUSIONS

27.      As a result of the Task Force report, the small states agenda continues to have a
higher profile in World Bank work and to receive heightened attention by the donor
community as a whole. This is witnessed by the ongoing commitment of our Small States
Forum partner institutions - the Commonwealth Secretariat, IMF, European Union, WTO,
UNCTAD - and by the attention to small states‘ development issues in strategic reports, such
as those considered by the Development Committee regarding harmonization and World
Bank support for country development.36 Institutional learning and cross-fertilization among
Bank staff working on small state and other country programmes continues to grow as well.
This is evident in the catastrophe risk insurance work, where the Caribbean experience is
informing the Pacific, and in the use of horizontal APLs, which were pioneered by the Bank‘s
Caribbean unit, adopted by staff working in the Africa region for the Africa Multi-Country
AIDS Programme, and used again for the Caribbean HIV/AIDS programme. Efforts to
further interdepartmental and interregional exchanges among staff and with partner
institutions will be pursued over the coming year, through more active use of the website and
thematic group. While we continue to make progress in assisting small states in meeting their
development challenges, there is still much work to be done. The World Bank remains a
committed partner in this effort.




36
      See Harmonization of Operational Policies, Procedures and Practices: Experience to Date, op. cit.;
      Supporting Country Development: Strengthening the World Bank Group‘s Support for Middle-Income
      Countries (DC/2001-0005), April 10, 2001; and World Bank Role and Instruments in Low-and Middle-
      Income Countries, (DC/2000-19), September 8, 2000, accessible at http://www.worldbank.org/devcom.




                                                      36
Acronyms

APL        Adaptable Programme Loan
CAS        Country Assistance Strategy
CDF        Comprehensive Development Framework
DLCs       Distance Learning Centers
DMF        Disaster Management Facility
ESW        Economic and Sector Work
FEMM       Forum Economic Ministers Meeting
FIAS       Foreign Investment Advisory Service
FSAP       Financial Sector Assessment Programme
GEF        Global Environment Facility
GDLN       Global Development Learning Network
HIPC       Heavily Indebted Poor Country
HIV/AIDS   Human Immunodeficiency Virus/Acquired Immune Deficiency
             Syndrome
IBRD       International Bank for Reconstruction and Development
ICT        Information and Communication Technologies
IDA        International Development Association
IFC        International Finance Corporation
IMF        International Monetary Fund
ITF        International Task Force on Commodity Risk Management
I-PRSP     Interim Poverty Reduction Strategy Paper
LDC        Least Developed Country
LILs       Learning and Innovation Loans
OECS       Organization of Eastern Caribbean States
PER        Public Expenditure Review
PRSP       Poverty Reduction Strategy Paper
UNCTAD     United Nations Conference on Trade and Development
UNDP       United Nations Development Programme
WTO        World Trade Organization




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