This post originally appeared as a column in India's Business Standard.
In the run-up to the G-20 Summit in London in April, China created a frisson of excitement by pushing for the use of Special Drawing Rights (SDRs) as an alternative to the dollar as a global economic currency. To be sure, there was self-interest in China’s dèmarche. It is also true that when China now talks, people must listen. But, the Chinese proposal was taken seriously—indeed for a few months, the global economic policy-making chatterati could talk of little else—because it had enough objective appeal and systemic relevance.
In all the discussions about the reform of the international economic architecture and the G-20 process, India’s predominant concern has been with getting a seat at the table. This desire for influence is appropriate and attaining it is long overdue. International economic arrangements, especially at the IMF and World Bank, are outdated and inequitable. Redressing these anomalies is a worthy endeavor. But acquiring influence cannot become an end in itself. “Influence for what” is a question that India needs to continually ask.
So, in the context of the G-20 discussions what big idea could India put forward and pursue that, like the Chinese SDR proposal, could both serve its long-term economic interests while also improving the working of international financial institutions? Here’s a suggestion: India should push for a radical re-orientation of the World Bank, so that it undertakes less traditional lending to governments and focuses more on financing global public goods, especially relating to research and development in climate change, tropical agriculture and diseases.
The World Bank is seen as a financial institution, primarily concerned with providing official financial assistance to developing country governments. But this perspective needs to change both for India and the world.
India’s need for official financial assistance is diminishing rapidly as it gains access to private capital markets and as India’s own savings has risen dramatically over time. Its development challenges—whether to cope with climate change or raise agricultural productivity—require technology breakthroughs, which India and all of Indian ingenuity cannot achieve on its own. India has a strategic interest in shaping the World Bank to generate some of this technology and other public goods.
The value to India of such goods generated by the World Bank is illustrated by the World Bank-financed and supervised research study—a classic global public good—which brought to light the serious problem of teacher absenteeism in primary schools in India. This study provided valuable input into, and radically changed for the better, the policy debate in India on primary education. It fatally undermined arguments for pumping resources unconditionally into the public education system. How many of the Bank’s traditional lending activities can claim such beneficial impacts?
From a systemic perspective too, the World Bank needs to evolve away from being predominantly an aid agency, dominated by the G-7 and serving Africa. The need for this evolution is suggested by the empirical evidence.
It is awfully hard to find evidence that traditional aid, of the kind that the World Bank dispenses, works. In a series of papers, Raghuram Rajan, former chief economist of the IMF, and I were unable to find any positive effects of aid on long-run growth but did find evidence for some of the negative effects of aid in depressing manufacturing exports and worsening domestic institutions.
On the other hand, some of the biggest contributions to development have come from global public goods such as the green revolution and the medical breakthroughs, especially related to the development of antibiotics and vaccines. The technical discoveries leading up to the green revolution were financed by official aid and private philanthropy. And the adaptation of the green revolution technologies to varying climactic conditions across the developing world was actually undertaken in the internationally-funded CGIAR network of research institutions (including ICRISAT which is located in Hyderabad) that are now sadly in decline, in part due to international financial neglect.
Despite this evidence, the World Bank’s current lending practices overwhelmingly favor traditional lending to governments over global public goods. The numbers are difficult to pin down but global public goods financing is unlikely to exceed 20 percent of total World Bank lending. In other words, current practice is inversely correlated with the evidence. What makes this inverse correlation particularly egregious is that there are many suppliers of traditional aid (bilateral donors, NGOs, private philanthropy) but few suppliers of global public goods. The World Bank should be filling the latter empty space instead of further crowding the lending business.
In the run-up to the next G-20 summit at Pittsburgh, India is now considering asking for a substantial increase in the World Bank’s capital. Seeking such an increase is not undesirable but it could suffer from two limitations. More capital to finance more traditional lending would not, if the evidence cited earlier is right, yield the biggest bang for the buck. Moreover, this capital would be poured into a structure of governance that is antiquated and skewed undesirably in favor of the G-7. What strategic interest of India is served by this proposal to enlarge the Bank’s capital base?
India should rather put forward a new vision for the World Bank, nudging it to emphasize global public goods. One possibility suggested by Nancy Birdsall of the Center for Global Development and I is for the World Bank to consider a different governance structure for its global public good activites. This could be the thin end of the wedge for perhaps eventually breaking up the World Bank into two institutions: first, an aid agency, devoted to traditional lending activities, and which could be continue to be dominated by the G-7; and second, a new institution that focuses more on the creation of global public goods and one in which the middle income countries such as India, China and Brazil, could start making greater financial contributions and in return obtain commensurate power and influence.
Referring to the two Bretton Woods financial institutions, Keynes once wittily observed that the “Bank’s a fund and the Fund’s a bank.” Whether the IMF should continue to be a bank is being hotly debated. But it is in India’s interest to push the Bank to be less of a financial fund and more engaged in generating and financing ideas and technology for development.