The Head of the World Bank Group
On February 6, 2019, President Donald Trump nominated David Malpass to be president of the World Bank. He was undersecretary of the U.S. Treasury Department for international affairs. Malpass had criticized bank lending to China. Now he needs the support of China and Japan who are the top two World Bank shareholders after the United States. He was officially approved on April 9, 2019.The administration had also considered Indra Nooyi, former PepsiCo Inc chief executive, and Ray Washburne, CEO of Overseas Private Investment Corp.The World Bank president reports to a 25-member Board of Executive Directors. Among the contributing countries are France, Germany, Japan, the United Kingdom, and the United States.?The person nominated by the president of the United States has been selected the World Bank president since its founding. The voting power of the United States is 15.49%, making it the largest shareholder.
Many members complain that the Bank represents the interests of the developed world and not the poor countries it assists. Jim Yong Kim, M.D., Ph.D., was president from 2012 to 2019.? He resigned on February 1, 2019, three years before his term ends. He joined private equity fund Global Infrastructure Partners. Dr. Kim had been the president of Dartmouth College. He advocated for improved health services. Robert Zoellick was president from 2007 to 2012. During President George H.W. Bush's administration, Zoellick served with Secretary of State James Baker, III, as Under Secretary of State for Economic and Agricultural Affairs. Zoellick held executive positions in Fannie Mae from 1993 to 1997 and the Office of Trade Representative from 2001 to 2005.? From there, he went to the State Department in 2005 until 2006 and then on to Goldman Sachs from 2006 to 2007. The Bank has more than 10,000 employees from over 160 countries.
The World Bank's Fights Climate Change
The World Bank has joined the fight against climate change because it could push another 100 million people into poverty by 2030. It's increased climate financing to 28% of its portfolio.That includes funding nations' plans to add 30 gigawatts of renewable energy by 2020.It also supports early warning systems for 100 million people.? It's developing climate-smart agriculture for 40 countries. The Bank also uses the true cost of carbon in all its projects.
The New Role of the World Bank
The World Bank was founded to address what we would today call imperfections in international capital markets. Its founders thought that countries would borrow from the Bank temporarily, until they grew enough to borrow commercially . The Bank could arguably address capital market failures if private banks would not lend to truly creditworthy projects in developing countries out of fear that they would not be repaid. In that case, a multilateral institution backed by the world’s governments might be able to secure repayment. Some critiques and analyses of the Bank are based on the assumption that this continues to be its role. For example, some argue that the growth of private capital flows to the developing world has rendered the Bank irrelevant.
We will argue that modern analyses should proceed from the premise that the Bank’s central goal is and should be to reduce extreme poverty, and that addressing failures in global capital markets is now of subsidiary importance. The overwhelming majority of Bank subsidies from its shareholder countries go to the International Development Association (IDA), its arm for making grants and highly concessional loans to the lowest-income countries, and other funding vehicles for the same countries. The Bank’s greatest impact comes from its role in the dramatic policy changes many developing countries have undertaken in multiple sectors that most economists would consider likely to reduce poverty, either by increasing growth or promoting equity. The Bank’s stated goal is reducing poverty.
Why might donor countries choose to work through an international organization to advance the goal of reducing poverty? Developing country government policy is a key factor influencing poverty, with an importance far greater than the direct impact of aid. Effective aid therefore often involves negotiating agreements with recipient country governments that include policy reforms. There are economies of scale in negotiating such agreements that can be realized by an entity such as the Bank, and pooling funds into such an entity may also improve donors’ collective bargaining position in negotiations with governments. Moreover, we argue that the World Bank’s status as a multilateral organization and its technocratic staff enhances its credibility and legitimacy in policy discussions with developing-country governments. This has allowed it tremendous policy influence relative to the explicit and implicit subsidies it receives, making it a bargain for those who value its mission of reducing extreme poverty and share its mainstream economic views on what policies best advance that goal.
Below we discuss what the Bank does: how it spends money, how it influences policy, and how it presents its mission. Based on this, we argue that the role of the Bank is now best understood as facilitating international agreements to reduce poverty, rather than more narrowly addressing international capital market failures. Finally, we examine implications of this perspective for the Bank and for assessing the performance of the Bank. For example, the Bank should not conceptualize its principal activity as capital investment, but instead should consider a broader range of activities and instruments. Moreover, attempts to measure the Bank’s success by regressions that use economic growth rates as the dependent variable and disbursements of aid as an explanatory variable will be misleading.
The Cost of the World Bank, and Its Focus on Poverty
The World Bank Group operates through divisions that have differing roles. Three of these groups can arguably be interpreted either through the narrow lens of addressing international capital market imperfections or through the broader lens of poverty reduction: the International Bank for Reconstruction and Development (IBRD), which lends to governments; the International Finance Corporation (IFC), which invests in commercial projects; and the Multilateral Investment Guarantee Agency (MIGA), which sells insurance policies to private investors against noncommercial—that is, political—risks. The IBRD, IFC, and MIGA work primarily in middle-income countries, with financial terms ostensibly close to market terms. Their books show them earning profits. However, they receive an implicit subsidy because they have the use of capital that shareholder governments have placed with the Bank, and IBRD shareholder governments also cover the risk that enough deals will go bad that the Bank would need to call on their pledged capital. As discussed below, academics have debated the extent to which those components of the Bank are solving international capital market failures, as opposed to simply providing subsidies.
Other parts of the Bank do not seem focused on addressing capital market failures, but are much easier to understand as contributing to poverty reduction. These include the Bank’s fourth arm, the International Development Association (IDA), and various Trust Funds that the World Bank administers on behalf of donors. IDA was established in 1960. Instead of requiring market interest rates, IDA offers a combination of grants and of loans on such highly concessional terms that they amount to grants for very low-income countries, currently defined as those with per capita income of less than $1,215 per year (at market exchange rates). The World Bank Group also holds Trust Funds supported by donors and used for pre-specified purposes related to addressing poverty (broadly defined) such as fighting AIDS and malaria, immunizing children, or promoting access to education in the developing world.. In general, Trust Funds are not intended to generate financial returns. Donors subsidize these povertyfocused parts of the Bank much more than the other parts.
Table 1 shows a breakdown of the opportunity cost of capital to shareholder governments. The first few rows show the paid-in capital from governments to the IBRD and the IFC, along with the amount of retained earnings that have been accumulated over time from past repayments of loans or liquidating other investments. The first row under “Flows” multiplies the stock of $64.8 billion by 3 percent to estimate $1.9 billion per year in opportunity cost in the foregone interest from investing in a riskless security—the 20-year Constant Maturity Treasury rate. This analysis exactly follows the methods of Meltzer (2000) and Gurría and Volcker (2001), updating their results.
In the second row under “Flows”, we estimate the cost of IDA at $8.0 billion, representing annualized donor replenishments over the last decade. The remaining flows describe disbursements from “trust funds”, with which Bank operations are financed directly and concessionally by donor governments rather than from Bank capital. We exclude “financial intermediary trust funds”, which are simply pass-through accounts for operations outside the Bank, and include “Bank-executed trust funds”, which directly finance Bank operations. The remaining category, “recipient-executed trust funds” (RETF), mixes support for Bank and nonBank activities. We thus provide estimates with and without RETF disbursements.
The last few rows of Table 1 show an extremely rough estimate for the risk that the Bank might call on its shareholders for additional capital. There is $218.8 billion in capital that could be called, according to the rules of the World Bank, although it never has been. The current outstanding World Bank loans total $152 billion. Thus, for example, if one-third of those loans default completely, representing a loss of $51 billion, $42 billion of this loss could immediately be covered by the existing stock of IRBD capital, leaving $9 billion to be drawn from the callable capital. If the risk to callable capital is equivalent to a 5% annual risk of an event such as this, the implicit subsidy paid to cover the risk of such high losses would be about $0.5 billion per year.
The vast majority of the donor subsidy embodied by the existence of the Bank goes to very poor countries. Overall, Table 1 estimates that the total subsidy provided by the World Bank Group’s shareholders to clients overall is in the range of $11.0–14.2 billion per year, which includes a conservatively large allowance for risk to donors’ callable capital. The range in this estimate reflects uncertainty about what portion of recipient-executed trust fund disbursements support operations of the Bank itself. Of this total, aid given through IDA accounts for $8 billion, and most of the $3 billion from recipient-executed trust funds supports activities in IDA-eligible countries (Huq 2010).
The World Bank’s Policy Role
The annual donor subsidy embodied by the Bank, on the order of $11–14 billion, is trivial relative to the economies and budgets of both recipients and donors. The total GDP of clientcountries receiving IDA credits is $2 trillion; the total GDP of IBRD-only borrowers is $27 trillion. The total GDP of the Bank’s ten largest donor-shareholders is $47 trillion, and their total government budgets exceed $13 trillion. Focusing on financial flows misses a key part of what the Bank does, for good or ill, in shaping developing-country and donor policy. Below are a few examples.
Agriculture. In the past many African farmers could only sell to agricultural marketing boards that operated state-run processing facilities and paid a fraction of the world price for export crops. Ghanaian cocoa farmers shortly after independence were only receiving 55% of what the board received for selling their produce; Kenyan cotton farmers in the mid-1970s were getting only 48% . This was a common practice in African countries; nine of the ten countries examined by Kherallah et al. had created agricultural marketing boards . The state also ran markets for inputs, such as fertilizer, often delivering them not at all, or only to politically connected farmers, or too late for planting. The Bank promoted liberalization of agriculture and policies have changed dramatically. Monopsonistic agricultural marketing boards, where farmers were only allowed to sell to a quasi-government organization at a predetermined price are now mostly gone. Seven of the nine countries surveyed by Kherallah have removed or reformed their state marketing boards.
Health. The World Bank promoted a shift in budgets away from tertiary-care hospitals in capital cities towards community health centers and rural clinics providing basic primary care, for example through Ethiopia’s Health Extension Program and Brazil’s Family Health Extension Program. Health budgets are now substantially more oriented toward primary care. At one point the Bank pushed for charging fees to at least certain categories of patients, although it has now backed away from this (World Bank 2015a). It now frequently promotes the adoption of pay-for-performance programs within government health services.
Education. The Bank has been an important part of the movement for universal primary education. The number of out-of-school children and adolescents worldwide fell from 196 million to 124 million between 2000 and 2013 (UNESCO 2015), despite population growth over the period. Now that the vast majority of primary-school age children in the developing world are enrolled in school, the Bank is shifting towards focusing on improving learning.
Social protection. The Bank has played an important role in the spread of “conditional cash transfer programs”—in which cash transfers to low-income households are linked to children attending school or seeing health care providers. After promising results from Mexico’s PROGRESA in the 1990’s (now referred to as Oportunidades) and Brazil’s Bolsa Alimentação program, the Bank now supports conditional cash transfer programs in 26 countries (World Bank, no date). The Bank financially supported national programs and vigorously promoted conditional cash transfer programs, including at international conferences convened for that purpose in Mexico in 2002, Brazil in 2004, and Turkey in 2006. The Bank’s researchers also played an important role in rigorously evaluating the impact of these programs, a factor in their rapid diffusion. Such programs have been found to reduce poverty and improve child health and education.
Regulatory policy. The World Bank’s Doing Business reports, which provide objective and internationally comparable measures of how different countries regulate the private sector, have been very influential in motivating countries to reduce regulatory barriers to establishing new firms. Tax policy. While the International Monetary Fund (IMF) has played a bigger role, the World Bank has supported the dramatic worldwide shift to value-added taxes (VAT), which have replaced other taxes widely considered less efficient. Since 1960, a VAT has been adopted as the main consumption tax in over 140 countries.
Trade policy. The Bank, along with the IMF, has supported shifts from rigid import quotas to more flexible tariffs, along with reductions in tariffs, and movements toward “unified” exchange rates in which the same exchange rates are applied to all types of trade. From the 1980s to 1990s, most World Bank adjustment operations were made conditional on trade liberalization. Tariffs and statutory barriers to business creation have declined dramatically. In India, for example, the weighted tariff rate has fallen from 54% to 7% between 1990 and 2009 (World Bank, 2015b). Conflict recovery. In post conflict situations, the Bank has supported community-driven development programs and procedures for demobilizing and providing transitional support to excombatants, for example, in Bosnia, Cambodia, El Salvador, Lebanon, and Uganda.
Property rights. Since the 1960s, the Bank has supported land demarcation and titling programs in Armenia, Bolivia, Guatemala, Indonesia, Malawi, and elsewhere across the developing world (World Bank 2011). Thailand used World Bank support to partition and distribute land to rural residents (Bowman, 2004). Whereas governments once regularly appropriated private assets, they are now more likely to privatize state assets.
This long list of policy areas where developing countries have dramatically changed policies following Bank involvement suggests that an important way to judge the Bank is a) the extent to which the Bank played a causal role in these changes and b) whether these policy changes were appropriate and effective in reducing poverty. Below we discuss some of the evidence on the extent to which the Bank had a policy role and the methods through which its influence works. However, this is not the place for a detailed examination of the appropriateness of all these policies. We do not agree with all of them, or believe they were all well implemented, but we agree with the general thrust of most of them and believe that they reflect mainstream views within the economics profession.
It is, of course, very difficult to assess precisely the extent to which World Bank actions played a role in the policy changes listed above. No doubt global changes in international relations and in ideology played a role, as well. But there is reason to believe that the Bank caused substantial increases in the extent and speed of the changes above. Take the spread of Conditional Cash Transfers (CCTs). While CCT’s were a Brazilian and Mexican innovation, early World Bank evaluations and promotion of CCT policies gave them greater credibility and legitimacy before a worldwide audience.
The World Bank magnifies its policy influence through a variety of mechanisms. For example, at the national level, the World Bank normally chairs groups of bilateral donors that negotiate with recipient-country governments. When the Bank withdraws support from a particular government ministry, other donors often follow. This pattern gives the Bank considerable power to influence overall donor flows, and additional leverage in negotiating with client governments.
Beyond this, the Bank plays an important role in the process by which ideas move into policy by collecting data, generating ideas, bringing ideas to a wider policy audience, and turning the ideas into specific policies. At the global level, the Bank sets agendas with publications such as the Doing Business reports and the annual World Development Report. Such reports can be influential; many national leaders, including Narendra Modi in India and Vladimir Putin in Russia, have aimed to improve their standings in the Doing Business reports by removing barriers to business investment.
Like the World Health Organization (WHO), the Bank’s influence derives in large part from its “soft power.” Politicians may have a huge interest in which districts get new hospitals and which firm gets the contract to build the hospital, but they may be happy to defer to the health ministry on the proper regimen for treating malaria, and the health ministry may be influenced by WHO recommendations on international best practice. Similarly, the World Bank can have huge influence on decisions regarding conditional poverty alleviation programs.
In many countries where the Bank operates, it fills an important void of independent policy discussion. Often, political competition is focused on patronage or ethnic and cultural issues rather than economic policy; there has not historically been a large role for think tanks as brokers of ideas to policy makers; and the senior civil-service is stretched thin. This creates an environment in which Bank staff can have tremendous influence. The World Bank recruits internationally and pays salaries higher than those in most civil services, allowing it to attract staff who often have very strong academic qualifications. Staffers come from a variety of countries, including developing countries, and are not seen as promoting a single national perspective. Bank staff have access to policymakers and often build strong relationships of trust with key civil servants. When civil servants debate policy options, those who can argue that their preferred position complies with international norms may be less likely to be seen as merely advocating a position designed to advance their personal and bureaucratic interest.
Organization and Operations
The World Bank Group is composed of five separate institutions: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes. Each of these agencies is owned and operated as a cooperative by its member countries. Together, the IBRD and the IDA are commonly referred to as the World Bank. The bank's six largest shareholders- out of its 189 members- were the United States, Japan, China, Germany, France, and the United Kingdom.
Ultimate policymaking authority at the bank rests with the board of gover ors, mostly made up of senior finance or development officials from member countries. The board of governers, in turn, delegates certain powers to the board of directors, which is composed of twenty-five executives and the World Bank's president.
The International Bank for Reconstruction and Development. The IBRD was established in 1944 as the World Bank's charter institution. Through loans, guarantees, and other services, the IBRD words with middle-income and creditworthy low-income nations to fight poverty. Projects span the globe and vary from digitzing health systems in BElarus to reducing air pollution in Colombia to generating solar power in Pakistan.
The International Development Association. As a complement to the IBRD , the IDA was established in 1960 to promote broad-based development work in the world's poorest countries by offering interest-free credits and grants. The IDA currently has programs in sixty-nine countries, of which thirty-seven are in Africa, with a focus on education, health and sustaintable environmental practices.
Criticism of the ‘Washington Consensus’
The World Bank, like the IMF, has been the subject of much criticism over the years. In his 2006 book, The White Man’s Burden, former World Bank economist William Easterly delivers a broad indictment of Western efforts at poverty reduction. “The plan to end world poverty shows all the pretensions of utopian social engineering,” he writes. The bank’s attempts to rapidly impose free markets on developing countries in the 1980s and 1990s, known as economic “shock therapy,” produced a “record of failure” in Latin America, Africa, and former Soviet countries, Easterly writes, saying client nations would be better served by homegrown, piecemeal reforms.
Joseph Stiglitz, one of the most vocal critics of the World Bank, resigned from his position as the institution’s chief economist in 1999, criticizing the bank’s advocacy of what he calls free-market fundamentalism for many developing countries. Stiglitz argued the economic reforms the IMF and World Bank often required as conditions for their lending—the so-called Washington Consensus of fiscal austerity, high interest rates, trade liberalization, privatization, and open capital markets—have often been counterproductive for target economies and devastating for their populations. In particular, he links indiscriminate lending conditionality to the onset of financial crises in East Asia in 1997 and Argentina in 1999.
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By: Jyoti Das