It is more than 75 years since the World Bank was founded at Bretton Woods. Clearly, today’s world is a different place, so is the World Bank still fit for purpose? Danny Leipziger is well placed to have a view on the subject.
The announcement by President Biden at the G20 Summit that the US would be willing to support $25 bn in new capital for the World Bank to help boost lending was an auspicious signal1. Not only did the Administration shame the previous Bank president into resigning, but it also placed a person with extensive private sector experience into the Bank’s top role. Apart from the question of how to increase the resources at the Bank, so that it might not only continue lending at its recent level of $35 bn in IBRD loans and an equal amount in IDA quasi-grants to the lowest-income countries, there is the more complicated issue of how to change the Bank’s lending policies in order to have greater impact.
The World Bank makes both project-specific loans as well as programmatic loans, most recently labelled ‘‘Development Policy Operations’’. The former involves careful project design, slow disbursement, and supervision, while the latter is based on a critical mass of policy reforms backed by “writing a cheque”. Many countries prefer the latter, since it fills balance-of-payments needs at borrowing rates and maturities better than what the market can offer. One recent complication is that major capital contributors, like the US, want the institution to mobilise greater sums for climate finance. While, for many developing countries, projects would be for climate adaptation and resilience purposes, some would involve mitigation as well.
Much of the new-found enthusiasm for the World Bank comes from the idea that it can finance global public goods (GPGs), such as those related to reducing emissions, but of course relations with China and the push to expand the BRICS can also be seen as triggers. The overarching question, however, is whether the current Bank model for lending and engagement with borrowers is still “fit for purpose”. We would argue that it isn’t and that major reforms are needed to accompany the so-called ‘‘Evolution Roadmap’’2. These changes involve shifts in strategy, instruments, and the internal “plumbing” of the Bank, namely its incentives, human resource policies, and ways of operating.
There are some core issues that the new leadership will want to address and, as usual, there are more- and less-ambitious approaches. The most recent organisational restructuring, orchestrated by Jim Kim, was poorly executed and it failed in the end. His successor, David Malpass, opted for the status quo, which was seen as part of the Bank’s inadequate response on the climate agenda. Put bluntly, however, for the Bank to have greater impact both for resilient and adaptive development strategies as well as to make a dent in the realm of GPGs, some fundamental changes are required. The first concerns what the Bank lends for and this may necessitate a move away from a totally demand-driven approach.
Without a doubt, borrowing countries need to be in the driver’s seat on borrowing, since it is they who are the ultimate signatories to loan agreements. However, being client-driven does not mean that every Bank Country Director (and there are 40 of them) should be the main arbiter of the Bank’s lending strategy. Thinking back to the 1970s and 80s, it was the Bank that promoted family planning programmes, policies aimed at poverty reduction, and then policy changes in response to global oil prices and new trade opportunities. Now the “nudging” needed is toward resilient infrastructure investment, agricultural adaptation to climate change, and energy diversification, just to name a few. These are sectors where additional expertise needs to be developed and where the Bank can increase its presence. These investments may need to come with a reduction in cheque-writing via DPOs. However, they should not come at the expense of the Bank’s most important contribution to development, namely institution-building and technical assistance.
One suggestion is to consider the “leverage factor” as a new major criterion for lending, that is whether, by undertaking certain sectoral investments it encourages the private sector to join in those investments. Of necessity, this will need to include the IFC, the Bank’s private-sector arm. However, this coordination inside the World Bank Group has bedevilled the institution for decades and is a hard nut to crack. That said, Bank lending should be redirected away from balance-of-payments support and implicit debt relief to lending that crowds in markets. This crowding-in can be promoted through policy understandings on sectoral and macroeconomic policy, but it also likely requires some risk mitigation or risk-sharing with the private sector. This will impact the Bank’s financial picture, and thus this must be carefully designed.
Now that the USG has forced the Bank to “sweat the balance sheet” to try and lend more with its current capitalisation, it is the moment to increase Bank capital so that it can help make a dent in the new challenges facing developing-country borrowers. Many of these borrowers are middle-income countries, those with capital market access, some of whom are reluctant to borrow, despite some financial advantages. They prefer capital markets that ask fewer questions, or perhaps Chinese loans that may at the outset seem to be beneficial but also carry many hidden costs3. To make loans more attractive to middle-income countries, those that contain GPG elements in the climate change area might be eligible for easier terms. Of course, a funding source for this implicit subsidy would need to be found, perhaps from major emitters.
One proposal worth investigating is to have essentially three lending windows at the World Bank. The first would be the traditional project window, but with a reformed process of determining lending priorities. Currently, Country Strategy documents are too general, too idiosyncratic, and largely irrelevant. Moreover, the IFC’s strategy for the country may differ in focus. In its place would be a strategy that identifies the binding constraints to growth and offers Bank lending to alleviate some of the major challenges. If policy reform is required, these would be undertaken along with the projects with modalities to be developed.
The second window would be for institution-building and would entail a large element of technical assistance and advisory undertakings. Standard reports would be limited in scope, but cooperation agreements between the Bank and borrowers would replace broad strategies and the provision of technical assistance would be more results-based. To be successful, both government commitment and metrics for judging the impact of advice might prove useful and progress on these institutional elements would be reported annually, so that private investors could note progress and governments would have incentives to see their performance metrics improve. Whether new products would be required or whether existing ones can be amended is an open question for implementation.
The third and newest window would one related to climate financing, by which the Bank should refer to limiting the damage from climate change, improving resilience, reducing emissions as commensurate with country circumstances, dealing with relocation issues for vulnerable groups, and protecting those elements of GDP that are at greatest risk. This window might have both programmatic and project components based on a systemic assessment. Currently, the CCDR, or Country Climate and Development Report, does much of what may be needed, although care needs to be exercised to stress adaptation concerns ahead of mitigation concerns for many Bank borrowers. Some projects, for example those dealing with energy conversion to clean sources, would be eligible for improved terms.
The upshot of these reforms, and others will need to follow, would be to improve the effectiveness and efficiency of the Bank and to enable its leadership to make a new and stronger case for a general capital increase (GCI). Having done all it can to increase its lending within the constraints of preserving its AAA bond rating, which seems sacrosanct, now is the time for the Bank’s major shareholders to improve its financial capacity5. Now is also the time to move from pronouncements to actual proposals, and the Bank can help itself by undertaking some fundamental reforms in the way it conducts its business. Alongside such a ‘‘reinvention’’, to use Secretary Yellen’s language, would come much-needed reforms in the human resource side of the Bank in order to help restore its world-class expertise. These actions might also require a review of the Bank’s aggressive decentralisation approach, as well as its mandate in conflict zones, so as to establish a clear set of priorities that shareholders understand and support.
There is no dearth of external reports and advisory commissions on what should shape the Bank going forward. Frankly, however, many of the exercises are aspirational and do not adequately deal with the nuts and bolts of the Bank’s bureaucracy, the so-called ‘‘plumbing’’. Some innovative ideas may well prove useful to prod internal reforms, including those considered untouchable. In the end, it is the role of the new leadership to shape these new policy directions. That said, here are a few tough nuts to crack to fix the plumbing.
One such consideration is the degree of decentralisation of the institution. The current model is exceedingly costly, and one at odds with rebuilding centres of expertise and excellence6. While there are benefits of local offices, it is incorrect to think that one has to “touch the poor” in order to help them. A reset to a model of regional hubs would therefore make sense, with a retrenchment of personnel and a reduction in local staff positions. Second, in the marketplace for ideas, the World Bank established itself as the go-to source for policy advice based on extensive research and country experience; however, its position has eroded. This is a second area for leadership attention, that is, the re-establishment of excellence based on fundamental HR reform and reversal of some counterproductive past policies. Third, a thorough review of spans of control, effective management, and the degree of autonomy of senior technical staff is warranted. Too much time is spent on internal inclusiveness and too little in generating results in real time.
The World Bank, along with the IMF, was established more than 75 years ago at Bretton Woods, and it has undergone major structural changes over its history. It shifted from a rebuilder of Europe to a development leader. It moved from pure project financing to structural adjustment at the time oil price hikes diminished development prospects. It then became a driver of debt relief and a leader in measuring governance. It maintained its poverty focus and has been a source of major institutional support in high-growth, middle-income economies, as well as a major player in low-income countries. It is now being asked to place the climate change agenda front and centre. It can rise to this challenge and in return ask that its shareholders do the needful by increasing its resources. This will not be an easy task, but one thing is clear: the status quo won’t produce new capital for the Bank. Regaining a pivotal role will require new ideas, a shift in paradigm, and fundamental reforms.
About the Author
Dr Danny Leipziger is Professor of International Business and International Affairs at George Washington University, where he is concurrently the Managing Director of the Growth Dialogue. Professor Leipziger has been a faculty member in the highly ranked International Business Department since 2009, where he has taught both undergraduate and graduate courses on macroeconomics, applied development, financial crises, and international economics, and he has taught in the GW/IFC/Milken Capital Markets Graduate Program for mid-career government officials since its inception. He has been an advisor to the governments of South Korea, Vietnam, Ivory Coast, Uzbekistan, Argentina, and South Africa, among others.
A former Vice President for Poverty Reduction and Economic Management at the World Bank (2004-9), he served three World Bank presidents and held senior management positions in the East Asia and Latin America Regions. While at the World Bank, he led the team preparing the emergency financial bailout loan to Korea in 1997. He was the World Bank’s Director for Finance, Private Sector and Infrastructure for Latin America (1998-2004). He served previously in the US Department of State and was a member of the Secretary’s Policy Planning Staff. Dr Leipziger was Vice Chair of the Spence Commission on Growth and Development and he served on the WEF Council on Economic Progress.
An economist with a PhD from Brown, he has published widely in development economics, finance and banking, and on East Asia and Latin America. He is the author of several books, including Lessons of East Asia (University of Michigan Press), Stuck in the Middle (Brookings Institution), and Globalization and Growth, and more than 50 refereed and published articles in journals and other outlets. He is a frequent contributor to VoxEU, Project Syndicate, and other media, and he has appeared on Bloomberg, BBC, CCTV, and Korean TV as an expert commentator.
References
- See the G7 Hiroshima Leaders’ Communique, 20 May 2023, The White House, Washington, DC
- See latest World Bank Roadmap, “Ending Poverty on a Livable Planet”, Annual Meetings, 28 September 2023
- See many reports on the Belt and Road Initiative, e.g., Gelpern, A., Horn, S., Morris, S., Parks, B. and Trebesch, C., “How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments”, Peterson Institute, KIEL Institute, Center for Global Development and AidData at William and Mary, 31 March 2021.
- It has long been argued that the Bank and IDA should not alter terms depending on the sector or nature of the project. However, there have already been exceptions. As part of a strenuous effort to increase the Bank’s capital, additional special capital could be provided by interested donors to bring down the cost of borrowing for MICS who agree to climate-related projects. Other risk-mitigation schemes may be considered to increase private-sector co-financing of projects, assuming that the Bank is ultimately responsible for procurement and supervision.
- Many of the suggestions provided by the Capital Adequacy Taskforce have been either examined and/or implemented.
- The Bank currently has almost 130 field offices of various sizes that employ half of its permanent staff and account for one-third of its total operational budget.
