The World Bank – Is 50 Years Enough

A summary from Henry Owen’s article in Foreign Affairs, Volume 73, No. 5.

An honest, right-wing account of the changes needed to reform the World Bank in face of the changing global economic situation.

A child of war, a parent of prosperity

The World Bank (WB) was founded post-WW2 to prevent a global economic decline similar to that post-WW1. Since then, there have been substantial changes to the world economy and the institution has had to change its policy and posture to take account of this. It has offered large scale financial and technical assistance. For example, thanks to its work India has been able to feed itself greatly improving its prospects.

Two deficiencies have become clear. Its loans are made at market rates and therefore repayments are often unaffordable for poor nations. The International Development Association was created in 1958 in an attempt to counter this and allowed donor governments to subsidise repayment rates. Additionally, the WB was formed at a time when governments were the main economic actors of the world. As the private sector grew in importance it was clear the WB’s effectiveness would be limited, hence the creation of the International Finance Corporation which is prohibited from lending to anyone over than private entities. The Multilateral Investment Guarantee Agency was created for the same reason. The WB has also been particularly prominent in research and development of new technology, particularly within agriculture. It played a leading role in the ‘green revolution’. The WB must also play a greater role in co-ordination of aid between countries and regional development banks. Critics argue that too much of the WB’s focus has been on large-scale projects. They miss the point – the outcomes are what matters.

Many nations, particularly in South America and South-East Asia, have reached a level of development that means they can rely on private funding and no longer need WB assistance. Central and Eastern Europe have embraced political and economic change; Russia and the ex-Soviet states have lagged behind, the aftermath of 7 decades of Communism. Even in rapidly developing nations it is clear that WB Group help is of great use, particularly in the public sector (health, education and infrastructure), as is the IFC in the private sector. Although the changes in the developing world are all different, they share the common feature of increasing private influence and a decline in the role for government. The relative roles of the WBG and the IFC is likely to change. The needs of developing countries are likely to be met by private investment banks, commercial banks, investment trusts, pensions funds, insurance companies and other sources of large private capital in the industrialised world. The WB must respond to a world in which supra-national institutions, NGOs, private corporations and sub-national bodies play a role as important as the nation-states that created the institution.

The WB faces two overlapping challenges. Firstly, how to enhance the role of the private sector in client countries and expand the role of the IFC, whilst promoting environmental interests, increased transparency. Secondly, how to reduce the role of the bank and the IFC in face of growing private financial institutions and markets in donor countries. This requires a shift in attitudes at the bank towards a belief that helping the private sector should be the highest priority. The IFC could be enlarged or could launch a global infrastructure fund in which private banks and multilateral development banks could invest. The IFC could shift its focus from guarantees on repayments to guarantees on the performance of the projects it is funding. The IDA is a special case and its work is crucial to the poorest nations.

It will be difficult to ensure that private finance meets the needs of the poorest; markets do not fund projects that are viable, they fund projects that are good. Much of the WB’s work is misunderstood and NGO opposition to their work is a hindrance to ridding the world of poverty. To help gain greater public support, the WB needs to be more open, disclose more information and work more closely with NGOs. Not only do they deserve attention, but they can aid WB programs. Over the years, the WB has faced criticism from the right for preferring public sector projects and more recently from the left for ignoring the ‘little man’. They are wrong on both accounts but the WB must reform to take account of the massive changes to the economic system we have witnessed since its creation.