GEI Newsletter Issue No. 5

Wanted – A Vision for the World Bank
Christopher Gilbert

Also in this issue:

Editorial
The World Bank’s Struggle to Integrate the Environment

Wanted – A Vision for the World Bank
Christopher Gilbert

James Wolfensohn has been President of the World Bank for nearly two years. On 13 March 1997 the Board of the Bank met to discuss Wolfensohn’s ‘strategic compact’ – his proposals for the next decade of the Bank’s life. The Board, which consists of nominees from member governments, was asked to pass judgement on the proposed strategy for the Wolfensohn presidency. They duly approved. Were they right to do so?

To answer this question we have to ask another one.

What is the World Bank for?

Fifteen years ago, this question had a clear answer. The eighties was the decade of the ‘developing country debt crisis’, with countries turning in droves to official financial flows from the World Bank and from the IMF. That was the only way that they could service their debt, or get any capital flows at all. Fifteen years later, things are different. Rapid economic growth in Pacific Asia and in South America has given rise to a group of high-growth, ‘middle-income’, countries. Democracies have replaced dictatorships, free markets have replaced state control, trade has replaced tariffs, and crucially, private capital flows to developing countries are at now a historical high – they averaged $114 bn p.a. in 1989–95 against $12 bn p.a. over the six previous years. Does the world still need a World Bank?

Currently the World Bank does two things. First, it lends at heavily subsidized rates through its IDA (International Development Association) arm. This lending is shared out amongst the 60 least developed countries in the world (the ‘IDA countries’) who have little direct access to international capital markets. It is straight aid and continues to be essential. But it only makes up 30% of the Bank’s lending activities.

Second the Bank borrows funds in international markets and onlends to better-off, non-IDA, developing countries at a small mark-up over borrowing costs through its IBRD (International Bank for Reconstruction and Development) arm.

IBRD lending is currently problematic. Even with booming capital flows to developing countries, the IBRD is only lending at 55% of its capacity. The high-growth middle-income developing countries no longer need or want the World Bank; they dislike the conditions attached to its loans – governing policies that the country should pursue (e.g. the environment) – and have little difficulty in borrowing from other sources. The Bank appears to be marketing an outdated product. Wolfensohn’s response is that the Bank needs to update its product range, and reorganize. He wants a greater presence on the ground and to replace up to 10% of the staff with new recruits with better finance skills and more development experience.

This will be expensive. The World Bank Board members (and the governments which they represent) need to see a clear strategy. They need to be convinced that Wolfensohn’s proposed reorganization expenditure is a good investment. In the view of a group of us working on these questions1, Wolfensohn has produced only two-thirds of a strategy. He has addressed the cost side in his reorganization; by setting up an internal employment market, the Bank can now identify those staff whose contribution is inadequate. And on the revenue side, Wolfensohn has asked the right questions: what products should the Bank be selling to which clients, and at what prices? But he has yet to provide coherent answers. This is because he has not adequately addressed our original question: ‘What is the World Bank for?’

Our view is that the World Bank’s distinctiveness and strength derives from the way it bundles together three functions: lending, development research and development assistance. By lending for approved development projects, it is able to assist governments to benefit from its development experience. That experience ensures a higher success rate on loans than might otherwise be attained. This success pays for the research, which underpins the assistance.

Implications

Our view of the Bank has five implications.

First, privatization of the Bank would destroy the functional synergy. So too would any plan to make the Bank more like a private sector bank, particularly if the Wolfensohn ‘new-products’ strategy leads the Bank to undertake non-conditional lending to the high-growth middle-income countries.

Second, the Bank should not continue to think of itself as primarily a lending institution. But nor should it reinvent itself as a ‘knowledge bank’ – a half-baked proposal currently circulating in Washington. Rather, the Bank offers development assistance packaged with money.

Third, the World Bank can be made complementary to, and not competitive with, private sector banks. The Bank can, and does, lend to support the market institutions on which private sector development relies. And adoption of its development-orientated policies will increase the profitability of private lending.

Fourth, the World Bank should welcome, not regret, the extent to which many middle-income countries are now ‘graduating’ from its client base. Finally, the World Bank has traditionally lent mainly to the public sector, and Wolfensohn is rightly putting greater emphasis on private sector development. But his ‘new products’ strategy is insufficiently radical. An increased emphasis on the private sector urgently requires a shift of resources within the Bank (in particular a shift of capital); from the IBRD to the IFC (International Finance Corporation). At present the IFC is only one-tenth of the size of the IBRD, but demand for its products is growing rapidly. Only its products will enable the Bank to reverse the stagnation of its lending.

1 Gilbert, C.L., Hopkins, R., Powell, A and Roy, A., ‘The World Bank: its Functions and its Future’, Global Economic Institutions Working Paper No. 15, CEPR, London

right to congratulate James Wolfensohn on the progress that he has made. But it should now ask him for a clearer vision for the Bank’s future.

Christopher Gilbert is Professor of Applied Econometrics at Queen Mary and Westfield College, University of London. GEI research project, ‘Global Economic Institutions and Risk Management in Developed Countries’, is being carried out with Amlan Roy.

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