GEI Working Paper Abstracts

Working papers produced by the research projects in the Global Economic Institutions Programme have begun to appear. They are available for £4/$8 each from: Subscriptions Officer, Centre for Economic Policy Research, 90-98 Goswell Road, London EC1V 7RR, UK.

Papers: [1-5] | [6-10] | [11-14] | [15-16] | [17-22] | [23-26] | [31-35] | [36-45]

[46-47]

Working Paper No. 15

The World Bank: Its Functions and its Future
by Christopher L Gilbert, Raul Hopkins, Andrew Powell and Amlan Roy

July 1996

The World Bank has evolved over its 50 years of operation so that it simultaneously exercises a number of different functions. We identify four: the Bank as a bank, as development agency, as credit-ranking agency, and as a development research institution. The first two of these are central. The banking function is premised on the existence of capital market imperfections, of which that arising from sovereign risk is the most important. Acting as a development agency, the Bank provides finance for development purposes, often on concessional terms, which over the past 15 years has generally been combined with policy conditionality.

We argue that the role of conditionality is crucial to understanding the World Bank’s operations. The Bank imposes conditionality as part of its development mission – structural adjustment has resulted in policy reforms taking priority over projects as a justification for lending. But the ability to impose conditionality gives the Bank a comparative advantage in enforcement of debt service. This generates a complementarity between the Bank ‘s development agency and banking functions. But because successful conditionality will also result in improved service of private debt, there is an externality. The Bank is concerned with development and not simply profits, and is therefore willing to allow the gains from conditionality to be shared with private sector banks. This results in a superior lending equilibrium than would exist in the absence of a strong multilateral institution.

All of this would be lost by privatization of the bank either as a whole or split into functional groups. We see privatization as a distraction from the main issues facing the Bank. Most important is that there should be a shift in emphasis from provision to facilitation. This implies a shift from public sector to private sector funding, and an institutional shift from the IBRD to the IFC. The Bank should also lend less and guarantee more with the consequence that borrowing countries may be encourage back to the private capital market. This implies increased prominence for MIGA. Bank involvement in a country should evolve from provision to facilitation to exit. Direct provision of development assistance is now only essential in the LDC group of least-developed countries, and in eastern Europe and the ex-Soviet Union. Retreat in other areas, in favour of the IFC and the private sector, will create a leaner and less diffuse World Bank.

Working Paper No. 16

Phases of Imitation and Innovation in a North-South Endogenous Growth Model
by David Currie, Paul Levine, Joseph Pearlman and Michael Chui

August 1996

In this paper we develop a North/South endogenous growth model to examine three phases of deevleopment in the South: imitation of Northern products, imitation and innovation and finally, innovation only. In particular, the model has the features of catching up (and potentially overtaking) which are of particular relevance to the Pacific Rim economies. We show that the possible equilibria depend on cross-country assimilation effects anmd the ease of imitation. We then apply the model to analyse the impact of R&D subsidies. There are some clear global policy implications which emerge from our analysis. First, because subsidies to Southern innovation benefit the North as well it is beneficial to the North to pay for some of these subsidies. Second, because the ability of the South to assimilate Northern knowledge and innovate depends on the Southern skills levels, the consequent spillover benefits on growth make the subsidising of Southern education by the North particularly attractive.