Charting a New Course for the World Bank?

2012•12•24

Stephen Kingah and Georgios Papanagnou

UN Photo/Rick Bajornas

The views expressed in this commentary are those of the authors and should not be deemed as representing the views of UNU.

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In July 2012, Dr. Jim Yong Kim replaced Robert Zoellick and commenced his mandate as president of the World Bank Group. There have been suggestions that the new president will shape the institution in a different way and dwell more on issues of inequality and social responsibility in ways that eluded his predecessors.

Important questions belie the approach the Bank has hitherto embraced to discharge its mandate as a pro-development bank. The Bank is indeed an important institution for development. But the manner in which it operates cannot continue as it has in past decades following the articulation of the Washington Consensus. Its development model needs rethinking.

The Bank recognized this in a 2011 report. That is why it has started to review the way development is done, focusing on results rather than process. This essay is a contribution to facilitate this shift in a way that optimizes the bank’s impact on people in poor communities around the world.

In the current context of the financial crisis little, if any, attention has been placed on the model of development that will avert the excessive imbalances in current global finance and development. In the rich world, attention has been on checking profligacy and excesses. In developing countries, the concern has been that of closing the chasms between the poor and well-to-do.

For most poor countries, reliance on funding from development banks provides the main — and at times the only — life-line for survival and, if possible, prowess. Both in the North and the South, and in the Bank, there has not been a rigourous analysis or debate concerning the creation of a new model of development around which common denominators can be created to ensure that global development is not mortgaged by excesses in capital markets and the predominance of liberal orthodoxies.

What we argue here is that beyond issues of governance — which, though important, can be institutionally accommodated — the Bank has problems of substance. This entails that its model of development and of channeling money needs rethinking.

The pervading model has been that of conditionality induced structural reforms, which in many cases entailed massive cuts in essential public services. The point is not that all the reforms the Bank proposed were immanently dubious and deleterious for client countries. Rather the model regarded as Washington-led was based on four main assailable premises and assumptions hatched in the 1980s:

• that governments will be the main and, in most cases the only, partners, and would agree to a series of conditions;
• that the markets are vital in social redistribution, with little need for government intervention;
• that supply side economics, structural adjustment and fiscal discipline will lead to development through growth; and, finally,
• that the Bank has an indispensable role as a norm giver.

This essentially pro-free-market vision was also based on a number of path dependent trends: the predominance of the US and of Western nations as lenders, on the one hand, and the cardinally significant threshold of middle and emerging nations as the main destinations for loans on the other.

The rethinking of the current development model championed by the Bank is needed in light of five vital trends. These include:

• the crisis of the previous economic doxa, which began with the financial crisis of 2008 and to which the world has not been able to find a convincing answer;
• the imposing power of the internet, new ICTs, social media and virtual networking tools;
• related to the preceding point, an increase in the global influence of individuals and small groups to engineer change;
• a growing, shared sense of global social responsibility in the face of global multilevel challenges; and, above all,
• the undeniable growth in the influence of (re)emerging countries like China, India, Brazil, especially in the context of the current economic crisis.

Some of these challenges have much to do with governance in, and the legitimacy of, the institution.

Changes at the Bank

On governance, there has been an important increase in the number of mid- and high-level career managers from developing and transition economies. Two-thirds of all such positions now come from these countries. In terms of governance in the Executive Board, since 2008 the institution has undertaken vital reforms to reflect the demands for more seats from the South. As such, there has been an additional seat for Sub-Saharan Africa. Also, constituency constellations have been slightly shaped to provide a greater voice to poorer states.

In terms of voting weight or power, developing and transition countries wanted a 50:50 parity in the voting shares of the Bank. The problem was that they could not justify an increase of a proportion of 43 percent to 50 percent (in the non-concessional lending arm, the International Bank for Reconstruction and Development (IBRD)) parity with the donor countries. Wealthy nations insisted on the need for an objective and traceable basis for such parity demands.

Following the second phase of the reform discussions, a formula was suggested by Finland for members to use, inter alia, for International Development Association (IDA, the concessional lending arm) contributions of countries to determine prospective share subscription intake. In this manner, the voting share of China was significantly boosted, while the cumulative effect of the share adjustments have resulted in developing countries now accounting for 47 percent of the IBRD voting power. Given the path-dependent nature of the Bank and the institutional constraints in which its existence is embedded, it is fair to state that these steps, which appear minor, are relatively significant.

Such changes could not have come to pass without a constant push from developing countries. Importantly, a realization that the economic clout of China and Brazil, amongst others, will continue to grow has greatly shattered the path-dependent prospects of the institution. Power is clearly moving South and East.

Moving forward

The institution can either act on the five trends mentioned earlier to assure its continuous relevance, or it can decide to continue in its timid path of reform and be confined to history when forced to compete with the likes of the proposed BRICS Development Bank, Gulf-lending outlets and individual altruists.

First, the strategies adopted by the Bank to enhance transparency are worthwhile. They should continue and be broadened to make governments and companies (involved in Bank projects) more accountable to local communities.

In the past, the Bank has sponsored useful development ICT applications used in fostering development. It can broaden its support for tools that are used by individuals and local communities to monitor how governments use Bank loans and proceeds from projects funded by the institution. It could also take its transparency commitments a step further by opening executive board meetings to the public.

Second, the World Bank still has the added value of being a truly global development organization, in contrast to some of the regional development banks or the thematic financing bodies. This means that it has the power and leverage to engage emerging countries to take up more global social responsibility in challenges such as climate change and world hunger.

The danger for the Bank is that its questionable approach to development has led to, and may continue to lead to, a proliferation of development banks and other financial institutions that lack the willingness, capacity and, above all, legitimacy to forge real policies that improve the lives of citizens in a universal way. So even if there is allowance for the continuous proliferation of breakaway development bodies, the Bank has a unique interest and role to encourage countries to assume greater positions of responsibility within the institution in pursuit of commonly defined development goals.

Third, it needs a more socially conscious development. The Bank can no longer rely on the theory that wealth created through the private sector will trickle down. Policies that focus on bolstering the middle class are crucial. Additionally, in the face of global economic difficulties, it has to reconsider its predilection for supply side policies and its aversion to fiscal tools. Targeted support for local finance initiatives must also not be neglected.

Fourth, any rational assessment of the performance of the Bank results in the observation that it tends to do a lot, often poorly so. In a way this is ineluctable. Some of the tasks defined in its strategy as a knowledge reservoir, however, could be better dispensed by other entities, such as United Nations University institutes and programmes.

Finally, the Bank′s regionally focused tasks may be better left to its regional counterparts. As such, the entity could be accorded a mandate that focuses mainly on globally relevant investments, including in the area of climate change.

In fairness, however, this is a stricture that has to be directed more to the shareholders of the Bank. On many occasions, the Bank is burdened by parallel tasks such as administration of special trust funds that are created by Bank members with specific agendas.