How Has Environment Mattered? An Analysis of World Bank Resource Allocation

How has environment mattered for the
World Bank? The aggregate figures suggest that it has
mattered a great deal, since the Bank's total
environmental lending has exceeded $US 9 billion over the
past six years. In this paper the authors use newly
available data to address a more precise version of the
question: Across countries and themes, how well has the
Bank's environmental lending and analytical and
advisory activities (AAA) matched the incidence of
environmental problems? For their assessment, the authors
extend their previous work on local pollution and fragile
lands (Buys and others 2003) to consideration of global
emissions, biodiversity, water resources, and institutional
development. They construct cross-country problem indicators
for each environmental theme and combine them with country
risk measures to estimate optimal thematic lending and AAA
for each country. The authors then compare their estimates
with actual lending and AAA to assess the match between
environmental problems and the Bank's response. The
authors begin by constructing an overall indicator of
environmental problems from their thematic indicators. Using
regression analysis, they find a strong relationship between
countries' general indicator values and the scale of
their environmental borrowing, but a relatively weak
relationship for AAA. At the thematic level, the authors
find that problem indicators have relatively weak
relationships with both lending and AAA. Adding country risk
to the analysis, they test an optimal allocation model and
find that it is consistent with the Bank's actual
lending and AAA since 1998. The authors conclude that their
model's assignment of lending and AAA to countries
reflects the Bank's actual experience with partner
countries. The model's explanatory power is relatively
low, however, and when they compare model assignments to
actual allocations, the authors find many large
discrepancies for countries and environmental themes. Some
gaps may reflect activity by other donor institutions, but
many others may represent problems with efficient
implementation of the Bank's Environment Strategy. To
promote further discussion of this issue, the authors use
their optimal allocation model to develop measures of
lending opportunity by environmental theme for the
Bank's partner countries.