Born 70 years ago at the Bretton Woods summit, the International Bank of Reconstruction and Development (IBRD), now more commonly known as the World Bank, is well into pensionable age.
It was, of course, conceived primarily as an instrument through which the assets of the post-war world would be rebuilt. And indeed, the IBRD still works with middle income countries. But seven decades on, the Bank is a vastly different place and now includes the International Development Association (IDA) that provides loans to poor countries, the International Finance Corporation (IFC) that leverages private finance to meet development goals, and the Multilateral Investment Guarantee Agency (MIGA) that provides political risk insurance for investors.
So what is its defining role today?
This is a question Jim Yong Kim, now halfway through his four-year tenure as president, sought to address head-on when he won the top job after a contested election in 2012.
He went big and bold, first outlining the explicit target to end extreme poverty by 2030 — getting the rate of those in poverty to below 3% of the population. And then stating his ambition to achieve shared prosperity — a measure of inequality — by boosting the incomes of the bottom 40%.
BANK SHAKE-UP
He also embarked on a radical restructuring, creating 14 “global practices” cutting across projects and countries and imposed budget cuts of $400m (or 8%) over three years that saw the departure of a number of senior executives.
This shake-up inevitably created some discontent within the Bank, as Emerging Markets reported a year ago. That disruption may still be causing problems. One source tells Emerging Markets that officials they speak to talk of not knowing whether they will still be in their posts next week.
While free trade rather than protectionism benefits countries that take part, as economic theory has posited for two centuries, the benefits are not shared equally. Skilled workers benefit from higher wages resulting from their ability to produce goods such as software for the West, but low-skilled workers’ wages stagnate as they are stuck in less productive activities such as agriculture.
| Maskin sees skills role for Bank Eric Maskin, Nobel laureate economist and expert on labour markets, has told Emerging Markets that the World Bank has a potentially crucial role to play in offsetting the impacts of globalisation on low-skilled workers in developing countries. “The problem is getting unskilled workers to the point where they have entered the global labour market, which is difficult because if they are completely unskilled they have nothing to offer,” he said, on the sidelines of the 5th Lindau Meeting on Economic Sciences. “There should be more of an emphasis on human capital and less on physical capital — building things. The World Bank might consider making an investment in skills as the people getting those skills can take them wherever there are opportunities.” He said a “reasonable” response was to intervene to raise skill levels through job training and education. “Of course providing education and training is expensive and there is the question of who is going to pay for it. “Unfortunately the workers are not likely to be able to pay for it as they are some of the poorest people in the world,” he said, pointing out that firms would be unwilling to invest money in training people who would then quit for another employer. “So the obvious candidates are governments and international agencies like the World Bank.” |
“It seems that unfortunately people have not understood the reforms in that purpose-driven way. They are simply worried about their own jobs. There is a risk that other organisations like regional development banks and the IMF see the Bank as paralysed.”
There are some signs the restructuring is beginning to bed down. “The reform of the Bank is the big thing,” says Homi Kharas, senior fellow and deputy director of the Brookings Institution and a former regional chief economist at the World Bank. “The issue is that these reforms take a long time and one still needs to wait and to see what they deliver. It is one thing to have the reform structure and it’s another thing to see what good it does.”
Richard Newfarmer, a former economic adviser at the Bank who went through three restructurings, says the process was necessary but acknowledges it was disruptive. “He is trying to eliminate regional stovepipes and that is overdue and will help the Bank in its core mission of spreading good ideas around the world with a degree of finance. It is really important,” he says.
But Newfarmer, now a country director at the International Growth Centre (IGC), which uses academic research to help countries achieve sustainable growth, says the process has costs. “It is very disruptive to business processes and staff morale and the relationship with clients.”
POVERTY TARGETS
While the decision to put the target of eliminating poverty at the forefront has pleased the Bank’s critics who accused the institution of focusing on outputs rather than outcomes, it is still far from clear what the target actually means.
Kim has identified five countries where two-thirds of the world’s extreme poor are concentrated — India, China, Nigeria, Bangladesh and the Democratic Republic of Congo. Add in Indonesia, Pakistan, Tanzania, Ethiopia and Kenya and the share rises to 80%.
In 2005, the global poverty line was set at $1.25 per person per day. However, in May new price data from the International Comparison Program (ICP), a statistical partnership housed in the World Bank, showed the number of people living below $1.25 a day had been revised down to 600m because prices were much lower in most countries than was previously thought.
For India alone this meant the level of extreme poverty halved from 400m to less than 180m. Meanwhile the Asian Development Bank (ADB) has called on the development world to use more realistic measures of extreme poverty.
Asia hit its poverty target in 2005 — a decade ahead of the Millennium Development Goal — measured at $1.25 a day. However, the ADB said that was not a sufficient income to offset rising food insecurity and vulnerability. Using a poverty line of $1.51 a day, which is the average of national poverty lines of the nine least developed countries in Asia Pacific, the number of poor in Asia would rise from 473m to 1.5bn as of 2015.
“If you defined poverty as the ADB is now doing you would get an entirely different global distribution of poverty,” says Kharas. Similarly, using the new ICP data based on greater buying power would change the global poverty map.
Kharas points out that since the number of low income countries has fallen to just 36, of which most are in Africa, that would leave the Bank with a limited role. “So if you really want to think about the World Bank as a global bank it has to think of a mandate and a mission that is deemed to be relevant and pertinent and to the entire membership, and $1.25 poverty is not that.”
Newfarmer says there are people calling for the World Bank to focus on Africa but that it would be wrong to ignore large countries with high numbers of people in absolute poverty.
“My guess is that the World Bank is likely to maintain a global focus because it is a collective of 183 countries and these countries will want the resources of the World Bank,” he says, pointing to Chile, which is no longer a borrower but which has asked for advice on environmental economics.
NGOs are concerned that the poverty target applies to individual countries rather than simply as a global average. Nicolas Mombrial, head of the Washington office at Oxfam International, says the danger is to ignore countries “where the poverty is really bad but they don’t have big numbers so they don’t contribute much to the goal”.
Oxfam has raised the issue with the Bank. Kim told Oxfam the figure was an average but that the Bank would work in each country. “So it’s not clear,” he jokes. However, he believes there is strong support among both staff and members of the executive board for the Bank to continue to play a strong role in conflict and fragile states. “This is an area of real added value that the Bank has,” he says.
Oxford University’s Woods says it is essential the Bank does not lose sight of countries that may have escaped poverty but are vulnerable to a future shock that will tip them back in. “Ensuring the Bank is intervening to prevent a slide back into poverty in countries that might not have the largest poverty statistics but are hit by a natural disaster, a conflict over resources or an infectious disease means the Bank’s early intervention can prevent it plunging a population back into poverty.”
She points to the conflict in Rwanda and the Ebola outbreak in Guinea, Liberia and Sierra Leone. “We have seen how quickly even a country that’s doing OK can fall into a conflict or a crisis. These are small countries where the Bank can make a big difference.”
While the new targets will be useful to help focus the minds of Bank staff on the ground and to show the outside world it can achieve results, Woods says the targets would swiftly lose their value if they just became the objective.
COMPARATIVE ADVANTAGE
The other big challenge the Bank faces is to find a role in a world awash with capital thanks to the drop in official US and eurozone interest rates to close to zero.
As Kim said in a speech earlier this year: “Governments and companies can turn to many places for financing and knowledge. Our comparative advantage has to be so clear that countries, companies and other partners will seek us out for the best on-the-ground experience and advice available anywhere.”
But what is that comparative advantage? Once-poor countries such as China and India look to fund development initiatives through the Brics (Brazil, Russia, India, China, South Africa) Development Bank together with Brazil and Russia. “Middle income countries are to some extent seen as being competitors [to the Bank] and places that grow even faster [than the West],” notes Kharas.
He identifies the Bank’s comparative advantage as being an “honest broker” of packages of finance and technical expertise across a range of issues that development agencies will encounter. He says especially in fast growing developing countries, income levels are growing much more rapidly than the capability of the public sector to provide matching investments.
While a country might have the resources to embark on a major infrastructure project, it will need complementary investment in public regulatory systems and project management expertise. “It is a range of what I would call public goods and functions that governments should do,” Kharas says.
One area that outsiders hope the Bank will continue to focus on is climate change. Mombrial acknowledges the World Bank Group (WBG) was “more than ever” putting its weight behind the efforts to combat climate change. “But it remains to be seen how Kim can transform his speeches into action,” he says.
Last year the group invested 38% of energy lending in fossil fuels and 24% in renewables. “These numbers need to change,” Mombrial says. “Is he going to ensure WBG programmes are more climate sensitive by supporting a specific safeguard on climate change or push for funding for renewable energy to dramatically increase?”
‘SLIPPING STANDARDS’
NGOs are also worried the Bank is being tempted to relax its condition on loans in areas such as environmental protection and labour conditions in order not to lose out to rival sources of funding.
In August the World Bank released a first draft of its new safeguards framework that the Bank says consolidates decades-old safeguard policies into a “more modern, unified framework that is more efficient and effective to apply and implement”.
A submission by Alyansa Tigil Mina, a Philippine NGO coalition representing over 110 groups, warns the draft safeguards “will further disempower the poor from defending their rights to participation, equity and accountability while weakening minimum protection for the environment linked with World Bank investments and non-lending activities”.
Mombrial says he fears the Bank is being tempted into lowering standards to improve loan volumes. “This could have a bad impact. This discussion about safeguards is a good example where the Bank is using the excuse that there is competition and saying ‘we might be less relevant so let’s weaken the protections for people and for protecting the environment’.”
However, Newfarmer believes the reforms are well motivated. “I would interpret the change in standards as business processes and not a weakening of standards.” He says the Bank may have recognised that a general improvement in standards of public procurement means it can spend less money on basic procurement standards. “It can trust governments a bit more.”
He also believes the whole debate about competition is overplayed. “Of course the environment has clearly changed from 20 years ago. It is a more competitive environment and there is a greater global flow of knowledge and finance,” he says.
“I would prefer not to see this as competition but as increased opportunities for complementarities in particular countries.” He points to the collaboration between the World Bank and the IGC in Africa, where the centre is particularly active. “I think that both the World Bank and we benefited from the collaboration.
“The Bank has become more open to partnerships than it was five years ago and Jim Kim is maintaining that posture. As long as the Bank remains open to new ideas including those from academics and NGOs and people from developing countries themselves, I think it will play an important role.”
For Woods the unique capacity of the Bank is clear. “By pooling all the sovereign credit risk of all its members the Bank can access cheaper money than any member can — and any other lender,” she says.
“It can then lend the capital to make up for market failures and do things that the markets left on their own will not do. It can ensure that financing of policies or projects is of a long enough term to give a likelihood of success in places where that market’s not prepared to take that long term view.”
Kim’s challenge is to marry the supply of cheap money with the Bank’s knowledge while meeting his goals on poverty and inequality. “In a couple of years’ time I hope people won’t ask whether the restructuring has been completed,” Woods says.
“I hope those asking that question will focus on those for whom the Bank is delivering and whether it is faster and more effective. I really hope President Kim will be able to say ‘yes, we are’. It is in his power to ensure that the Bank does deliver.”