With any luck, the sad and strange saga of Paul Wolfowitz's tenure at the World Bank will enter its final chapter this week. When he goes, and few now doubt that he will, the Bank's owners -- the nations of the world -- will have a rare opportunity to think deeply and act decisively to ensure the institution not only survives, but realizes its considerable promise. What kind of World Bank does the world really need?
Some commentators (see for example, syndicated columnist George Will’s piece: The Real World Bank Problem) have argued that it’s just fine if the Wolfowitz affair destroys the World Bank. According to this ill-informed view: good riddance. I disagree. The world badly needs an effective World Bank, for two reasons.
First, the U.S. alone cannot be the sole missionary for free markets and democracy. Bank staff bring to governments in the developing world -- many incompetent and some ridden at all levels with the curse of corruption -- solid expertise on how to foster poverty-reducing growth. Even China , India and Russia, which are flush with private capital and borrow little from the Bank, value its advice--be it on education, agriculture, debt management, or pension reform. They see the Bank as an imperfect but essentially honest broker, with staff who have worldwide, practical experience. Unfortunately for the Bank, guidance for less-than-perfect government bureaucracies is not easily sold. Programs that help people "on the ground," like vaccinating children and providing small loans to poor village women, are more popular with taxpayers: results are visible and there seems less risk that the money will end up in Swiss bank accounts. In a popularity context, "charity" will always trump advice on banking supervision, tax reform, and electricity distribution, even though sound banks, fair taxes and village electricity are also crucial for development.
The Bank 's record is solid in these technical and policy areas. What it badly needs is more effective leadership in deploying this knowledge better. A first step is for the Bank to finally set a price for its advice, so that demand for its expertise rather than the supply of cheap loans defines its mission and guides its future.
Second, the world needs the Bank to provide global public goods. With its financial heft and technical expertise, the Bank is arguably the best-armed institution to address urgent 21st century challenges that are beyond the scope of any single nation state: fostering an overdue green revolution in Africa; creating incentives for development of an AIDS vaccine and new solar energy and biofuel technologies; helping poor countries to adapt to accelerating climate change; and combating money laundering, cross-border bribery and other international corruption.
Economists have long recognized that even well-functioning markets do not provide for national public goods, such as defense and prevention of contagious disease. Thus there is a role for government. Ordinary people understand this, too. That's why most of us pay our taxes. But while national governments exist to solve collective action problems for nation states, there is no global entity to provide for global public goods -- and certainly no stomach for a global tax system. How can the world finance these needs?
One solution is a global cooperative, a sort of club, where the nations of the world commit themselves jointly to do what no state would undertake on its own. (See my essay: A Global Credit Club, Not Another Development Agency [pdf]). Conceivably we could start such a club from scratch. But we already have one, and it is called the World Bank. The world needs a strong and effective World Bank to finance and coordinate the provision of urgently needed global public goods.
Take climate change. Resulting water scarcity and extreme weather threaten the agriculturally-based livelihoods of millions of poor people in the developing world. The Bank is uniquely placed to help address the resulting challenges, which are anyway fundamental to its poverty-reuction mission. But it currently lacks both the mandate and the financial instruments to make a difference. So far its role has been confined to pilot projects financed by ad hoc donations from a few of its members.
A visionary president ought to ask the Bank's member governments to provide a clear mandate and serious money to attack globally shared risks and exploit new technological and other opportunities. The Bank is currently asking for $30bn over three years to replenish funding for its activities in the world's poorest countries. Surely at least $3bn of that could go to grant-making for grossly under-funded "global" investments that would benefit the poor -- including new agricultural technologies, a malaria vaccine, and credible monitoring of greenhouse gas emissions.
Emerging market and middle-income countries -- including China, India, Brazil and Russia -- should contribute as well, whether with direct contributions or by agreeing that a hefty proportion of net income from the Bank's loans should go annually to a global goods facility. These contributions would ensure that developing countries have voice in the allocation of the resulting resources. Such collaboration would help to make the Bank an effective setting for the give-and-take on climate change and technology transfer that the world so obviously needs.
To be sure, the Bank faces many other problems. Prominent among these is the closed system for choosing the president (as the Wolfowitz fracas has amply shown), and perverse incentives that cause otherwise enlightened and committed staff to push always for more lending. The Bank's core business -- working with developing world governments -- will continue to be hard to explain to rich world taxpayers. Even before the Wolfowitz fracas, the Bank risked sinking into irrelevance, with private capital flows and high reserves reducing demand for loans.
The Bank is in desperate trouble. The world is in trouble too. We do not need yet another aid agency. We need a technically agile institution prepared to work on complex issues governments around the world face and committed to addressing the distinctly global challenges of this century. These are the challenges and opportunities awaiting the next president of the World Bank. Let us hope that this time around the international community chooses wisely.