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Zedillo Report Sparks Fresh Push for World Bank Reform

November 9, 2009

Zedillo at CGD

Former Mexican president Ernesto Zedillo called for far reaching governance reforms at the World Bank, speaking at a packed CGD forum on Friday. Discussants and other forum participants generally supported the recommendations of a high-level commission he chaired and much of the discussion focused instead on the power and politics of achieving changes necessary to make the bank more effective and legitimate.

The large audience included current and former World Bank board members and dozens of current or former World Bank staff, some of whom raised pointed questions about how Zedillo’s reform agenda could be implemented. Discussants included CGD president Nancy Birdsall; Moisés Naím, editor-in-chief of Foreign Policy Magazine, and Arvind Subramanian, a joint senior fellow at CGD and the Peterson Institute for International Economics.

Naím, a former World Bank board member and reformist minister of trade and industry in Venezuela, called the document “the best report on World Bank reform I have read in 20 years.” But he emphasized that not even the most rational set of recommendations can be implemented without building a strong political coalition and urged that the debate go beyond design to focus on factors that have stalled all previous efforts. “This is an exercise in power,” Naím concluded, “not in technocratic decision-making.”

Nancy Birdsall speaks at CGD's Zedillo Report EventBirdsall, too, urged getting on with the governance reform process and listed three simple steps, based upon the Zedillo Commission report, that she argued could be implemented in the near future. Step One: move to a 50/50 split in voting power between high-income and developing countries for governance of the International Bank for Reconstruction and Development (IBRD), which borrows on commercial markets and re-lends to the bank’s middle-income members.

World Bank President Robert Zoellick invited Zedillo last year to chair a high-level commission charged with developing a set of recommendations for bringing World Bank governance structures up to date. At the Friday event, Zedillo introduced the product of that commission's work, a report titled Repowering the World Bank for the 21st Century.

Zedillo described the bank as an institution that was designed to reflect realities soon after World War II, not the current world. And he warned that without the sorts of reforms he advocates, the World Bank will follow in the path of other institutions that have become "irrelevant and useless."

Change will not come from the current board or management, he said, but must come from the highest political levels—for example, from the heads of government who comprise the G-20 and represent the bank’s biggest stakeholders.

The Zedillo Commission report advises strengthening the voice of developing countries in the bank and creating processes that allow for smoother, more accountable decision-making. Among the concrete measures: shrinking the Executive Board and rebalancing it to increase the representation of developing countries, selecting future presidents in a transparent, merit-based manner, without regard to nationality; and creating a yearly performance review process to hold the World Bank president accountable.

Zedillo described the current Board as attempting an “impossible trinity” of roles—at once representing the interests of member nations, exercising responsibility for bank policy, and providing oversight of those same policies.

Panel at CGD's Zedillo Report EventDuring the panel discussion, Subramanian described what he termed a “cozy arrangement” between donor countries and recipient governments, with little urgency for reform from either side. “Those who are getting power, frankly, aren’t all that interested in change,” he said. He also warned of the need to carefully consider China, which is pursuing a distinct development-driven foreign policy independent from multilateral institutions.

In her comments, Birdsall cautioned that, while President Obama has demonstrated a commitment to multilateralism, Congress and the American public are, "at the moment quite beleaguered and, if anything, feeling isolationist." Nevertheless, Birdsall declared, "Now is a moment, unlike any in the last 30 to 40 years, where there is the possibility of change."

She listed several measures that could form the basis for a political bargain for reform. First, she declared, voting power at the IBRD should be split 50/50 between developed and developing countries by the spring of 2010. Such an arrangement is hardly radical, she said, and has been the rule at the Inter-American Development Bank for many years.

A re-balancing of the IBRD votes could be achieved, she said, in part by soliciting paid-in capital contributions from advanced developing nations, who now hold $3 trillion in reserves and have said they want a bigger bank.

Second, she endorsed the Zedillo Commission recommendation that the World Bank president be selected without regard to nationality. The problem, she said, is that reformists haven’t convinced the U.S. Congress that a non-U.S. World Bank president would be compatible with American interests. Even if selection were made without reference to nationality, “it would never happen that someone was selected that the U.S. didn’t want,” Birdsall emphasized.

A third component of the bargain, Birdsall suggested, could be separate boards for the IBRD and the bank’s soft loan window, the International Development Association (IDA), another Zedillo Commission recommendation.

There is an implicit difference between the two bodies, and different nations have interests in each, she said. As part of a deal in which the Europeans relinquish some chairs on the IBRD board, European nations could retain stronger voting rights in the IDA, which provides highly concessional loans to the world’s poorest countries.

“It’s not clear to me why there should be anyone sitting in an IDA chair who isn’t a recipient or a donor,” said Birdsall. Advanced developing countries who want to have a seat on the newly reconstituted IDA board could do so by becoming meaningful donors themselves, she said.

To accomplish this deal or any deal, Birdsall declared, U.S. leadership is critical. Securing U.S. participation, however, will require both an understanding of U.S. domestic politics and a strong partner from the developing world, most likely Brazil or China.

Zedillo responded to Naím and others by acknowledging that the Commission did not lay out a clear strategy to convince the developed world to embrace reform. However, he insisted, the current state of affairs is unsustainable, and it is in the enlightened self-interest of the bank’s largest shareholders to have a functioning institution. “What is the purpose of the U.S. to spend money on the Bank,” Zedillo asked, “if it’s not going to deliver what is expected?”

(A previous blog posting about the initial release of the report by Lawrence MacDonald, CGD vice president for communications and policy outreach, has prompted a lively discussion )