The World Bank Cannot Stop Reorganizing Its Private Sector Work: The Missing Welfare Anchor

Over four decades, the World Bank has cycled through multiple organizational forms for its Private Sector Development (PSD) functions. The latest iteration, now underway under President Ajay Banga, places PSD within one of five horizontal thematic “verticals” as the World Bank seeks to adapt to emerging challenges, including an expected gap of 800 million jobs in developing countries.

This paper posits that this cycle of organizational churn has focused on the wrong challenge. While other practices at the World Bank are organized around relatively stable operational lines—that is, what they seek to do—PSD has cycled through multiple approaches with shifting definitions, from privatization and financial sector development to financial inclusion and now industrial policy. This cycling has occurred without an analytically consistent definition of the appropriate role for PSD. This paper offers one approach: classical welfare economics.

When applied to PSD, a market failure should justify a PSD operation. Specifically, some distortion should prevent an efficient outcome in the allocation of labor or capital. The World Bank’s support should then aim to correct that distortion, not mitigate its impact or finance activity that would proceed on similar terms if the operation were not implemented.

The paper develops a three-part admissibility test for proposed PSD operations. First, the operation must diagnose a binding market failure. Second, the proposed operation’s instruments must address the economic distortion causing that failure. Third, World Bank participation must affect the counterfactual by changing investment or market outcomes that would otherwise occur on similar terms.

PSD anchored on welfare economic principles would persist across organizational forms and shifting policy agendas. More importantly, it would ensure that PSD operations expand economic activity without wasting public money or distorting markets and productive incentives.