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CGD in the News

World Bank: An Exercise in Influence (Financial Times)

April 3, 2012

CGD president Nancy Birdsall was quoted in a Financial Times article on the World Bank.

From the article:

Conventional wisdom about the World Bank goes something like this: dominated by the US – which by convention nominates its president – the bank has spent decades financing huge dams and power plants in developing countries, and demanding privatisation and deregulation from their governments in return for loans. These days, that role has been challenged by the growth of private capital markets and the rising power and wealth of borrowers such as India and China, leaving the institution casting about for a strong purpose.

However true that depiction, the battle that started in earnest last week to replace Robert Zoellick as the bank’s president reflects the complications of a world where power over the institutions of global governance is shifting from those developed nations that set up the bank to emerging economies. Nigeria’s Ngozi Okonjo-Iweala and Colombia’s José Antonio Ocampo are candidates much more in the old traditions of the US-dominated organisation than is Jim Yong Kim, America’s nominee.

Nancy Birdsall, director of the Center for Global Development think-tank in Washington, says: “A new president needs to corral shareholders with disparate interests to create a fresh mandate for the bank.”

If that mandate fails to be defined, emerging markets will increasingly seek the funding and support they need from other institutions instead and the World Bank’s relative importance will further shrink, as it has been doing for some time.

Set up during the surge of multilateralist enthusiasm following the second world war, the World Bank’s original aim was to help rebuild Europe and Japan. By the 1970s it was financing investment throughout the developing world. Its reach over borrowers’ economic policy extended rapidly and controversially during the 1980s. It extended loans to cash-strapped developing nations contingent on “structural adjustment” measures such as liberalising trade, privatising industries and abolishing controls on food and fuel prices.

Much of this deregulatory drive came from the US, the largest shareholder, which – especially during the cold war – was keen to export an American model of capitalism.

However, in the 1990s, and particularly during the 1995-2005 presidency of Australian-born investment banker James Wolfensohn, the bank moved towards becoming an all-round development agency concerned with health, education, corruption and the environment. Meanwhile the US and other rich countries came under pressure from environmental and development non-governmental organisations to soften their uncompromising focus on deregulation and growth. “Macro-economic policy by itself isn’t enough,” Mr Wolfensohn said in 1997. “We must also make sure that we give adequate weight to the human dimension, that we reach down to all corners of society.”

Though his reforms aroused opposition from some economists inside and outside the bank, who said it was losing focus and rigour, attention has continued to widen beyond economic policy – and, as middle-income countries such as China and India have gained more access to private capital, greater concentration has turned to the very poorest countries. Swaths of the developing world have in any case made strides towards economic stability and growth: hyperinflationary basket cases such as Zimbabwe have become rare exceptions.

Intellectually, the inconclusive battles of the 1990s within the development economics profession over liberalisation and poverty reduction have given way to a less ideological, more eclectic approach that includes the use of small-scale trials to test the effect of changes in, say, health or education policy.

While the US has continued to provide its president, the institution plays a diminishing role in extending American influence. Last year, Congress even planned to cut its contribution to the bank before relenting.

The bank has increased its technical capacity and sought to assist in policy making – for example flinging open its vast collection of economic, health and other data to free public use. However, its ability to respond on a large scale to issues concerning cross-border “global public goods”, such as health pandemics, water scarcity and climate change, has been limited.

Ms. Birdsall says: “The structure of the bank’s lending, oriented around single-country loans, has prevented its resources being deployed as well as they could.” For some pressing challenges, such as HIV/Aids in the developing world, the lead has been taken by institutions such as the Geneva-based Global Fund to Fight Aids, Tuberculosis and Malaria. For other cross-border issues, such as equipping poor countries to manage the effects of climate change, no international agency is in effective charge.

The gradual shift in the bank, and in the US’s view of its purpose, is underlined by a peculiar feature of the battle for the presidency. While US nominees have generally been bankers or politicians, Dr Kim has a background in public health, having run the HIV/Aids programme at the World Health Organisation, and in 2000 co-edited a book taking a sceptical approach to the traditional World Bank model for growth.

Meanwhile, Ms Okonjo-Iweala and Mr Ocampo are current or former finance ministers who graduated in economics from US universities, and in Ms Okonjo-Iweala’s case spent more than two decades working at the bank. In Nigeria, she has been closely associated with a politically contentious plan to cut public fuel subsidies and shift spending to more targeted services, a move straight out of the bank’s traditional policy handbook.

The US is confident of installing Dr Kim as president this month, with the Europe’s big voting bloc – about a third of the total – likely to reciprocate for the White House’s backing for former French finance minister Christine Lagarde’s successful bid to be¬come IMF  managing director last year.

The appointment process underlines the looming question of how the emerging powers, which have gradually increased their voting strength in the bank, want the global economy and its institutions to be run.

This produces another odd reversal. Whatever the personal views of the president, adapting the bank to the new reality of the world economy by giving more control to emerging market governments could restore an older focus on providing finance and boosting economic growth. Leading middle-income governments have very much their own ideas on what constitutes work on global public goods. Generally it does not involve the bank turning into a mere technical consultancy or imposing on infrastructure projects environmental standards bearing the imprint of pressure from rich nations.

Amar Bhattacharya, a former World Bank official who heads the directorate for the Group of 24, a caucus of developing countries, says: “We don’t see the World Bank as being just for the very poorest countries or the very poorest people, but playing a primary role in poverty reduction and growth throughout the developing world.” Mr Zoellick made a similar point in an interview with the Financial Times at the weekend, criticising “a view in some quarters in developed countries that the bank should work with the poorest countries and not with developing countries”.

Mr. Bhattacharya says the bank cannot address newer problems such as climate change without continuing to be involved in areas such as infrastructure, which means making tough choices and trade-offs. “India is going to triple its usage of coal in the next 20 years,” he says. “The only question is: does it do it cleanly or dirtily?”

Many emerging markets are also wary of assuming traditional types of official lending are obsolete. Private capital flows dried up rapidly after the global financial crisis hit in 2008, and the same could happen again. In 2009 and 2010 the bank was able to cushion the impact of the crisis on countries such as Indonesia with loans and credit guarantees – but, despite its first capital increase in more than 20 years, it remains small relative to global financial markets.

At the bank’s annual meetings last year, Pranab Mukherjee, India’s finance minister, warned that the institution would struggle to counter the effects on middle-income countries of another financial crisis. Having reached a record $44bn in 2010, he said, lending was likely to drop to about a third of that in coming years.

“The best and most effective crisis response is expanded lending and investment,” he told ministers. “We are worried by the lack of financial capacity in the bank to address any crisis needs.” Launching her campaign last week, Ms Okonjo-Iweala appeared to echo that sentiment, telling reporters: “I will work to create an institution that can work fast to support countries in times of volatility and uncertainty.”

In effect, Mr Mukherjee says: “The World Bank Group has developed a business model whereby developing country clients . . . finance a portion of what should legitimately be donor obligations.”

Ms Birdsall says it is possible to synthesise the different visions of the bank into a new, more purposeful institution. First, she says, it should become “a knowledge bank rather than a nanny bank”, responding to the financing needs of responsible emerging markets rather than dictating to them. Second, it needs to build up substantial capacity in forming and implementing policy on global public goods without having its spending tied to country-by-country lending.

It could in theory do both, but the risk is that it will do neither very well. With rich countries loath to give up their control over the bank, and with emerging market nations increasingly seeking finance elsewhere, it will be a strong president who can pull the divergent interests together and move the bank back to a position where it leads the global response to the biggest challenges in the developing world.

Read it here.