What will Zoellick’s World Bank look like?

Bretton Woods Project, 5th October 2007

With an increasing number of commentators asking whether and how the World Bank can remain relevant, chief economist François Bourguignon unveiled a draft overview of a ‘long-term strategic exercise’, and the IEG released an evaluation of the Bank’s work in middle-income countries.

In early 2007, Bourguignon began laying the analytical groundwork for a long-term (10 to 20 year) review of the Bank by then-president Paul Wolfowitz. Wolfowitz’s resignation (see Update 56) meant the project was put on the back burner. However, the timeline is now being driven by Bourguignon’s forced retirement end October. The paper identifies three priorities for the Bank: leveraging funds for the poorest countries with special attention on fragile states, renewing and expanding services in middle-income countries, and playing a greater role in global public goods.

The ‘glue’ in the poorest countries

The Bourguignon paper repeats what has been the Bank’s mantra in the current funding round for the International Development Association (or, IDA 15) (see Update 55), namely that the Bank should be the ‘glue’ in an increasingly fragmented international aid architecture marked by a proliferation of donors and issue-specific funds. To play this role the Bank is asking for a 20 per cent increase in IDA funding above and beyond what is needed to ensure that debt relief commitments are fully funded. With rumours that Nordic countries are considering reducing their contributions, and France, Japan and the US all struggling with budgetary constraints and/or currency devaluations, it is by no means certain that the Bank will get what it asks for. An additional meeting of IDA deputies has been scheduled for end October in Washington DC, before the originally scheduled meetings in Ireland in November, and Germany in December.

At their most recent meeting in Mozambique end June, IDA deputies discussed the issue of responding to fragile states, agreeing to lengthen the phase-out periods of exceptional allocations for countries coming out of conflict. A 2006 Independent Evaluation Group (IEG) assessment of the Bank’s work in fragile states (see Update 53) raised serious questions about both the way the Bank is organised internally to deal with fragile states, and the system it uses to allocate resources. Despite this, IDA deputies agreed that the Bank’s allocation system was “generally working well”. The Bourguignon paper suggests that in countries without functioning governments, the Bank should work to improve oversight mechanisms by including not only government representatives, but civil society and donors.

Following Wall Street

In its fight to compete with other lenders, the Bourguignon paper proposes that the Bank become more flexible and simplify procedures in middle income countries. Approaches considered include charging for analytical and advisory services separately from lending; easing rules to allow the Bank to lend more of its portfolio to less creditworthy middle-income countries; and the development of instruments to respond to sub-national (provincial) and supra-national (regional) demands.

Some of these suggestions respond to criticisms made by the IEG in September in its evaluation of development results in middle-income countries. The IEG finds that clients view Bank processes as “cumbersome”. The use of country safeguards in place of Bank-specific safeguards has been too slow. While clients assessed the Bank’s analytical and advisory work as of “high technical quality”, the Bank “failed to draw on [middle income countries’] own national capacity”. Internal cooperation among the Bank, the IFC and MIGA has been “underwhelming”. Finally, the IEG admonished the Bank to pay more attention to combating corruption, reducing inequality and protecting the environment.

In some of the first signs of the direction in which new president Robert Zoellick intends to take the Bank, the former Goldman Sachs vice chairman indicated in August that the institution would be extending the financial products of Wall Street to developing countries. Examples cited included insurance against natural disaster, protection against sudden swings in the value of currencies, or hedge funds to insure against a fall in commodity prices. Reaction to the proposals was mixed, with many questioning whether the Bank should be encouraging developing countries to invest in financial instruments which are being blamed for the current volatility in global markets.

In early October, together with the IFC and a private fund manager, the Bank announced an initiative to attract investment to local-currency bond markets. While this will be a welcome development for many countries, there may be strings attached. The IFC will launch a new index which will rate countries on “investability” criteria. Zoellick said that “the aim of this local currency bond fund is to establish a clear link between policy reform and investment. It will help to create a virtuous circle so that as developing countries become easier to invest in and their local market size grows, their weight in the index will rise and they will attract more investment.”

A rush to new products overlooks some simple facts – Bank loans are not as cheap as they once were, and the Bank still attaches far too many conditions to them. Zoellick announced end September a cut of 25 basis points in the interest rate charged to emerging countries (the first such cut in nine years) in return for a greater contribution from IBRD profits to IDA’s pot (from $1.5 billion in the previous round of financing up to $3.5 billion).

“Far larger role” in global public goods

The Bourguignon paper argues that the Bank could take a “far larger role” in so-called ‘global public goods’, specifically environmental sustainability, ensuring that global frameworks for trade and finance benefit developing countries, and creating and disseminating development knowledge.

While many shareholders find it tempting to pass off more and more of the world’s problems onto the shoulders of the Bank, there is good reason for caution. An IEG evaluation of the Bank’s support for regional programmes released in April (see Update 56) found that while the majority of programmes achieve their objectives, they often do not address underlying policy reforms, are weakly linked to national assistance strategies, and that incentives and procedures encouraging regional cooperation are lacking. In a 2005 evaluation of the Bank’s approach to global programmes (see Update 44), the IEG was scathing of the Bank’s selection of programmes to support, ability to measure value-added, management and performance.

More fundamental critiques question whether the Bank is the right institution to play a central role in the provision of global public goods. Robin Broad of American University, in her evaluation of the Bank’s knowledge bank function (see Update 53), finds the Bank biased towards a “neo-liberal free market ideology”, while the Bank-commissioned review of its own research led by Angus Deaton of Princeton University (see Update 54) questions the structural incentives which cause Bank policy to lead research rather than the other way around.

In two papers to be released at the annual meetings, ActionAid casts further doubt on the quality of the World Bank’s analytical and advisory work. According to ActionAid’s Eric Gutierrez, Vietnam – hailed by the Bank as one of the best-performing developing economies – “appears to have achieved its success because it has purposely diverged from the Bank’s standard policy advice”. Malawi reversed an earlier policy of phasing out fertilizer and seed subsidies, against World Bank wishes, and emerged in a significantly better position to deal with its chronic food shortages. Gutierrez says that if the Bank is serious about finding relevance, “it would need to open up its analytical frame and follow the advice of the Deaton report – that research should lead policy”.

In this, as in many other areas, there is the chicken-and-egg problem of reform of the Bank’s governance structures. Nancy Dubosse, research director at NGO Afrodad, asks “which other financial institution has, as its membership, nearly every country in the world? The priorities of the World Bank should remain those of its constituents: the provision of social services, health, and economic empowerment. Its financial assistance should be in accordance with the prevailing aid paradigm, incorporating the same democratic governance among its membership that it stresses with its clients.”

There appears to be a consensus amongst Bank shareholders that the discussion about what kind of Bank the world wants should precede a debate about how it is governed. A briefing by the South Centre and the Bretton Woods Project argues that the timing is right for developing countries to demand a series of far-reaching governance reforms of the IFIs.

Bourguignon held a series of informal meetings to discuss the draft in cities around the world in late August and early September. The board discussed it in September, after which final revisions will be made before its presentation to the board of governors at the annual meetings in October. The relationship of the long-term strategic ‘exercise’ to the eventual long-term strategy, and the scope of any consultation, will be up to president Zoellick to decide.

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