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The World Bank under Fire

Arvind Panagariya

                “At the entrance to the World Bank's headquarters in Washington, a large sign reads: ‘Our dream is a world without poverty.’… Unfortunately, neither the World Bank nor the regional development banks are moving rapidly toward that objective.”  Thus begins the indictment of the World Bank by the International Financial Institution Advisory Commission, chaired by the distinguished economist Allan Meltzer of the Carnegie Mellon University and including, as a member, the eminent Harvard economist Jeffrey Sachs.

Appointed by the U.S. Congress in November 1998, the Meltzer Commission was asked to consider the future roles of the International Monetary Fund (IMF), World Bank and regional development banks, which include the Asian Development Bank (ADB), African Development Bank (AfDB) and Inter-American Development Bank (IDB).  Last month, the Commission came out with its report, recommending sweeping changes.

Though the Commission’s recommendations are not binding, they offer much food for thought to those interested in the reform of the international financial institutions.  At a broad level, the Commission would like to delineate the responsibilities of the institutions more sharply, eliminating the duplication of activities among them.  IMF would become a quasi lender of last resort to emerging economies, with its lending limited to providing liquidity (i.e., short-term loans).  Its long-term lending activities such as the Enhanced Structural Adjustment Facility and the Poverty Reduction and Growth Facility would be eliminated.  Long-term loans to aid institutional reform and sound economic policies would become the sole responsibility of the World Bank and the regional development banks.

To eliminate the overlap across the activities of the World Bank and regional banks, the Commission would make the ADB the sole provider of long-term loans and aid in Asia and IDB in Latin America.  The World Bank would serve this same function in Africa until AfDB is ready to take full responsibility there.  The commission would also like to transform the development banks from capital-intensive lenders to sources of technical assistance, providers of regional and global public goods, and facilitators of an increased flow of private sector resources to the emerging countries.

The Commission has harsh words for the manner in which the World Bank has served the poor in developing countries in recent years:  “In keeping with a mission to alleviate poverty in the developing world, the Bank claims to focus its lending on the countries most in need of official assistance because of poverty and lack of access to private sector resources.  Not so; 70% of the World Bank non-aid resources flow to 11 countries that enjoy substantial access to private resource flows.”  The Commission continues, “The World Bank's rhetoric faults the private sector for concentrating 80% of its loans in a dozen economies.  It claims that its own lending provides resources to the entire developing world. In fact, official lending closely parallels private-sector choices.”  Dramatically, the share of the countries without adequate access to capital markets in non-aid lending has fallen from 40% in 1993 to less than 1% in 1999.

            Recognizing how small the development banks’ resources are in relation to private capital (for example, over the past seven years, the World Bank provided a net of $18 billion to developing countries compared with $1,450 billion provided by private sources), the Commission recommends that future lending by them be limited to countries that do not have access to private capital flows.  Countries with investment grade international bond rating or a per-capita income above $4,000 should be excluded from lending altogether.  The bulk of the lending should be concentrated in countries with per capita incomes of less than $2,500.

            It is difficult to argue against the Commission’s diagnosis and, indeed, many of its prescriptions.  James Wolfensohn, the President of the World Bank, tried recently in an article published in the Washington Post but without success.  Unable to muster persuasive counter-arguments, he resorted to populist rhetoric, which he uses frequently to disarm his critics.  “If the World Bank were to withdraw entirely from Asia and Latin America; if it were to stop lending to countries with a per capita income above $4000 a year,” he asserted, “it would cut out the marginalized, the poorest, the excluded who live in these countries.”

Now if the mere presence of the poor, marginalized and excluded is reason enough for the World Bank to lend money to a country, Wolfensohn should not miss out on the United States, which also has plenty of marginalized people, some visible right outside the institution he heads.  But most surely, the United States is capable of generating its own resources to fight poverty.  Carry this logic a step further and you have the Meltzer Commission’s recommendation.

Today, even in a poor country like India, the Government need not wait for the World Bank to sanction a loan, should it need a few billion dollars to finance an anti-poverty project.  And that may well prove less costly, since private lenders will not impose the conditionality on internal governance that is increasingly a part of the World Bank lending.  One also wonders whether the value of a billion dollars lent by the World Bank to China, which attracts more than $40 billion in direct foreign investment annually, is not much higher if lent, instead, to a country without access to private capital.

The Meltzer Commission’s recommendation to delegate official multilateral lending entirely to regional banks is also not without merit.  At least in principle, this will allow a better internalisation of regional externalities.  More importantly, it will return each region’s scarce talent back to itself.  At present, the World Bank captures a disproportionately large number of talented individuals from the developing countries.  The downside of the proposal is that regional banks may become even more politicised than the World Bank.

Developing countries have much at stake in the new architecture of the global financial system, perhaps more than developed countries.  They must actively participate in shaping the debate that has been stimulated by the Meltzer Commission. 

Economic Times, April 26, 2000