THE ROLE OF THE WORLD BANK GROUP IN A CHANGING WORLD AN UNCERTAIN FUTURE

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1 THE ROLE OF THE WORLD BANK GROUP IN A CHANGING WORLD AN UNCERTAIN FUTURE AN INDEPENDANT LINE OF THOUGHTS By René Costa For most people the World Bank Group (WBG the Bank) is one of these large and heavy bureaucracies in Washington, D.C, which general objectives of helping third world economies in their human and economic development are vaguely understood and, more than often, misinterpreted. Mr. Jim Yong Kin was appointed the 12 th President of Bank on April 16. The same week, the Annual Meeting of the International Monetary Fund (IMF) and the Bank took place. Surely, this is the right moment to better understand the WBG and to look forward to how it could enhance its intervention in a changing world shattered by natural disasters, global warming, conflicts, hunger, human dislocation, energy crisis, and financial hysteria, and where political and economic forces are rapidly moving to a new equilibrium. A Much Needed Financing Institution - The WBG is the oldest and largest multilateral development finance institution 1. It has 187 member countries; it is heavy staffed and has more than 100 offices worldwide. The Bank is currently involved in over 1,800 projects in virtually all the sectors of the economy. Since its inception in 1945, the Bank has helped millions of people gain access to jobs, markets, and social services; helped provide them with essential services such as water, electricity, and roads; and worked with governments and public agencies to improve governance and public finance management. It has provided access to extensive information resources, economic and social analysis, advisory services, market based loans to governments, concessional loans to poor countries, private sector loans, targeted investments funds, microcredit facilities, development initiatives, securities underwriting, investment assurance and international dispute resolution. More recently, the Bank has played a leadership role in the pledging, together with the International Monetary Fund (IMF), of reducing or cancelling the debt of the world's most indebted countries, most of which are located in Africa. The present Bank s strategy is to help developing countries raise the quality of the life of the people, as stressed in the United Nations Millennium Development Goals for 2015, which call for elimination of poverty and sustained development. These goals were translated into six strategic themes underlined by President Zoellick, the 11 th President of the WBG, in a major speech at the national Press Club in Washington on October 10, Under his presidency institution's capital stock has been boosted by more than $86 billion (+47%) allowing higher lending; assistance has been stepped-up to deal with the famine in the Horn of Africa; a major increase in resources of $49 million has been achieved for IDA which lends to the poorest countries; and a reform has been carried out to the World Bank's Executive Board and voting structure, to increase the influence of developing and emerging economies in the World Bank's governance. Meanwhile, the Bank has continued to be a well-resourced Bank wit AAA rating. 1 / The World Bank Group comprises two lending institutions: the International Bank for Reconstruction and Development (IBRD- the World Bank) and the International Development Association (IDA). In addition to these two institutions the World Bank Group also includes the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and International Center for Settlement of Investment Disputes (ICSID). This paper covers the Bank, IDA and IFC only (the Bank), with reference to the other institutions as the discussion may call for. 2 / These themes are to help the poorest countries (with IDA); to meet middle-income countries specific needs; to prevent conflict and support reconstruction; to spur multilateral action and global partnerships to address global public good issues; to foster economic integration of the Arab world; and, to remain the premier source of development knowledge. 1

2 Short of Expectations - Yet, these meaningful achievements are responding only partially to the new global world development challenges and balances, and their impact on the developing countries basic needs and poverty alleviation, let alone their economic performance, has not been commensurate with the size of the issues at stake. Several factors could be evoked. Perhaps the most important one is that the dominance of Official Development Assistance (ODA) in capital flows to developing countries ended in the early 1990s, decreasing from 77% of investments in 1972 to 15% in Indeed, global markets are increasingly eclipsing the Bank as provider of finance. In the course of fiscal years , Bank commitments never went over $50 billions and its net disbursements over $13 billions. Whereas IDA s commitments are increasing ($16 billion for FY2011), its annual disbursements have never been higher than $10 billions. These figures have to be compared to capital flows to developing countries, which reached $1,130 billions in Thus, the Bank s financial leverage it enjoyed during more than four decades that follow its creation has been progressively eroded. A second not less important factor is the emergence of medium-developing countries as political and financial powers. Since 2005 capital flows to developing countries have been mostly to the BRICs countries (Brazil, Russia, India and China) 3. According to the United Nations Department of Economic and Social Affairs (2006), the 50 least developed countries only receive about one third of all aid that flows from developed countries, raising the issue of aid not moving from rich to poor depending on their development needs but rather from rich to their closest allies. The Bank has followed the same pattern. Its financial statements as of December 2011 show that five countries (China, Brazil, India, Turkey and Mexico) account for 46% of the Bank portfolio. Moreover, the BRICs at their fourth summit in New-Delhi on March 29, 2012, considered the possibility of setting up a new development Bank for mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries. If one reasonably assumes that this changing path of new balanced power continues and that these countries will be able to finance their investment needs with their own resources and borrowings on the capital market, the Bank s participation in the medium-developing countries pursuit of development will have to be geared to more global fields of activities, further than traditional investment projects. As regards the poorest economies, they seem not to be better positioned to benefit from more capital flows. According to the 2010 World Bank Global Economic Prospects, the poorest countries are unlikely to have the space to respond to the economic dislocation caused by the 2008 financial crisis without significant additional assistance. Considering the recent hardly obtained increase in IDA replenishment, together with donor s general tendency to reduce their aid flows to these countries after the global recession, they most likely will come short to meet their minimum development targets. Under these circumstances, the Bank has strived to respond to all kinds of requirements and demands regarding development issues, but unfortunately has not been able to take the lead in any. With constrained resources, its actions indubitably have been fragmented, wide extended and too thin. In addition, the Bank s personnel policy seems to lack the kind of salary structure and levels, fringe benefits and career development patterns that are necessary to attract high caliber professionals able to readily grasp development issues and help finding most innovative suitable solutions. Consequently, its borrowers less and less look for the Bank s technical assistance that for a long time was one of its main attributes. The Bank s effectiveness is also 3 / South Africa has been recently welcome to the BRIC. 2

3 suffering from a heavy bureaucracy and a cumbersome organizational structure that is detrimental to quick-decision making. Claiming for Changes During the first few decades of its existence, the Bank was instrumental in the reconstruction of Europe. The institution then took a strong leadership in the financing of large projects of power generation, irrigation, urban development and integrated rural development. Since the early 90s, the Bank s focus has shifted more and more towards poverty alleviation and smaller investment operations while pursuing perhaps too challenging structural adjustment programs. There is no question that the Bank should continue to pursue its general mission of poverty alleviation. However, in order to regain its worldwide influence the institution would need to reorient its activities toward the transfer of its world experience and the financing of operations, which objective would not only be to alleviate the living conditions of populations, but also to address issues of global concern. Looking for Reforms - Contrary to general belief, these challenges of a planetary nature, changing trading balances, financial instability, regional conflicts, and decreasing availability of financial resources, do offer the Bank an exceptional opportunity to build up its assistance on issues where its comparative advantage towards other financial institutions, donors and private corporations is irreplaceable. Indeed, the Bank s long experience in all sectors of the economy and its familiarity with practically all the issues faced by developing countries, provides the institution a unique ability to set up a systematic process of connecting people to each other and to the information they need to effectively act, in other words to enhance performance through the identification, capture, validation, and transfer of knowledge. Since the mid 90s, knowledge management has been on the Bank s development programs and the new matrix system that the Bank introduced at the same time was to be the vehicle to transform the Bank into Knowledge Bank. The Bank committed enormous resources to achieve this objective, regrouping its knowledge activities into three main categories: knowledge for external clients (e.g., economic and sector work, technical assistance, impact evaluation, training); internal knowledge (e.g., the development of new products); and, knowledge as a public good (including the preparation of the World Development report, research and global monitoring). Yet, while it is acknowledged that knowledge produced for clients has been of high quality, the magnitude of knowledge work in the Bank is difficult to estimate, let alone the impact it has on the quality of services provided. Moreover, the large volume of operational knowledge has not been efficiently captured and shared. Dispersion of efforts within a very heavy organization structure, with offices in many countries, the growing number of Trust funds and fee based services, and lack of effective communication within the institution s matrix organization, whereby country operations feedback is in conflict with head office s priorities, which is still strongly oriented towards lending operations, have made knowledge dissemination cumbersome and expensive. This situation is unsustainable, for the Bank cannot be the depository of knowledge for all matters concerning development. A leaner Knowledge Bank is called for and Knowledge in the Bank has to be redefined. The Bank should then become more selective in order to become more effective. The institution should strive to focus its operations on the fields where it best excel and leave other institutions deal with issues where its expertise is less called for. More particularly, the Institution should refrain itself to use its scarce resources to financially support activities that other institutions could finance, encourage international and regional development institutions to increase their 3

4 financing of more traditional investments. Its activities at country level should be realigned with those of the IMF. Likewise, more execution responsibility should be delegated to the developing countries themselves, making them more conscious that their commitment is essential to the success of development. Addressing Challenges - What are the essential issues that the Bank might focus on to regain its influence it once had, and where a large part of its resources should be reoriented? These issues mostly concern our planetary environment and the natural or human generated catastrophes that endanger the life of large populations. They include, global warming, earthquakes, deforestation, and water resources and fisheries depletion. They are also of humanitarian nature. They concern the management of nutrition and health, and the problems of immigration and control of population depletion or increase. In many of these fields, if not in all of them, the Bank has acquired a long experience, and might have become a true depository of knowledge for a few of them. This is where the Bank should take the lead in making the world know that it could rapidly intervene with its technical expertise, ability to organize global intervention and financing projects of global concern. To that end, the Bank should have the liberty to negotiate and to engage high-income countries to participate in large-scale operations where the Institution might take the lead. Perhaps this would also mean that the Bank would have to adapt its By-Laws to this new endeavors, thereby being able to help finance operations of a global nature covering both developed and developing countries. Such a shift of focus in Bank s priorities would not mean that the Bank would completely disengage itself from the financing of specific investment and social development projects in developing countries. But its financing would have to become much more selective and might include, the financing of basis infrastructure, the development of energy resources, urban development and reconstruction after conflicts. In all these activities, the Bank would focus on the promotion of public private partnership (PPP), the promotion of financial intermediation, organization of labor markets, and greater local input in the preparation and implementation of development programs. The Bank would also aim at helping governments introduce rules and policies in order to increase transparency of decision-making and good governance of public institutions to limit corruption. Finally, it is clear that in order to successfully carry out its newly defined mission, the Bank would need to perhaps fundamentally rethink its human resources management. More particularly, new recruitment policies should be established that would attract the best talents from the international public and private sector, capable to rapidly adapt to changes in different global environments. It would also mean that, in order to retain the talent it needs, the Bank should offer to staff excellent medium- and long-term career development patterns, competitive salaries and fringe benefits making them enthusiastic with the institution s objectives. Conclusion - Truly enough, no one can disregard the Bank s achievement in most issues of development. Yet, it is certain that the Bank would face more and more difficulty to survive as an important effective world development bank if new directions are not taken. Its resources are limited and new actors have entered international capital flows, development problems are now planetary, and new strong economies are surging. Spreading too large and too thin is not a viable approach. The Bank has to reemphasize its actions towards global challenges while maintaining its general objective of poverty alleviation and economic development. René Costa 4

5 April 2012 René Costa is a retiree from the World Bank where he spent 27 years in different position, from project manager in the infrastructure sector to line manager in the Latin America and Caribbean, North Africa and Middle East and Sub-Sahara African countries. He has also a diversified experience in the private sector, prior and after his career in the Bank. 5