June 2007

Do We Still Need the World Bank?

On July 1, 2007, Robert Zoellick became the World Bank's new president. While his first order of business is to restore the Bank's tattered credibility, he also needs to map out a long-term strategy for the organization.

What should be Mr. Zoellick's priorities in adapting the World Bank to the realities of the twenty-first century? How might the Bank's lending program to its poorer member countries be made more effective? How should the Bank deal with corruption? Should the Bank continue to lend to middle-income countries? These questions were addressed on June 14, 2007 at AEI  in a keynote speech by U.S. Representative Mark Kirk (R-Ill.) and discussed by a panel including Colin Bradford of the Brookings Institution, Dennis de Tray of the Center for Global Development, William Easterly of New York University, and AEI's Adam Lerrick. Desmond Lachman of AEI moderated.

The Honorable Mark Kirk (R-Ill.)
U.S. House of Representatives

The World Bank entered a policy drift under former presidents James Wolfensohn and Paul Wolfowitz, creating cause for concern. The Bank has become overly bureaucratic and no longer plays a leading role in the top five global policy issues. Funds have been misallocated many times recently, particularly with Iran. It is implausible that a country that exports 2.6 million barrels of oil per day needs the Bank's assistance. Moreover, the Bank's efforts with parallel institutions such as the United Nations (UN) and developed countries have been poorly coordinated. Proposed legislation suggests that in order to fix this problem, the secretary of the treasury should reduce U.S. bank contributions during any time period to match Bank disbursements to Iran from the previous year. Second, the United States must increase Chinese support of nonproliferation treaties with Iran in the UN Security Council. The United States could build support by creating a multi-billion dollar loan facility that would wean China off Iranian oil. The Bank's priorities have changed in recent years, but with the right tactics, the United States can still reassert its influence within the institution.

William Easterly
New York University

The World Bank has shown a lack of common sense in the last few years. Firstly, it has bypassed free markets in favor of public relations (the Bank has failed to mention free markets in several reports). It has also given more and more aid to “gangsters”--low-income, corrupt countries. Some member countries have become over-involved with the Bank, attempting to do too much at once. This has encouraged the fragmentation of funds. The Bank, however, is doing considerably better than other international institutions. Reform through independent evaluation is the best way to improve the Bank's current situation.

Dennis de Tray
Center for Global Development

The World Bank is not a foreign policy institution; it is a development institution. The world needs a World Bank-like institution because the most pressing issues today are global issues. Development is a global public good. The benefits of developing a country expand beyond that country's borders. Developing Afghanistan thirty years ago would have saved us enormous pain and suffering today. Unfortunately, the Bank is too big and too lending-oriented. It has badly managed internal incentives and lost its focus. While the Bank today is similar to what it was thirty years ago, the world is very different today.

Nevertheless, the Bank needs to continue to be active in middle-income countries, because these countries still face major development challenges. They need the Bank's knowledge. For example, China is sitting on $1.2 trillion, but it borrows from the Bank because it can benefit from the Bank's expertise.

In order to achieve its development goals, the Bank needs to be able to measure progress in developing and middle-income countries in a more effective way. The Bank's current incentive structure distorts the broad goals of development. The international community has taken over the responsibility of everything from governance to corruption to production capacity in countries in which the Bank operates. The Bank must also stop micromanaging development. Instead, it should return authority to governments and then hold them accountable.

Adam Lerrick
AEI

The World Bank can play a valuable role in global affairs that it currently does not. The Bank is an insignificant source of funds to its major clients. Two-thirds of all Bank money goes to countries that neither need the money nor want the advice. The Bank's supporters claim that countries borrow from it for its knowledge. But in reality, they borrow from it for the subsidy. As the subsidy has disappeared, so have the borrowers. The idea of bundling advice with lending does not make sense. The Bank is the only consultant in the world that pays its clients to take its advice. Moreover, the data show that the Bank's advice actually has a negative value. Countries would rather give up a 3-4 percent subsidy than take the advice. China continues to borrow because it views borrowing from the Bank as a way to have influence over the Bank; it does not want the Bank's knowledge or advice. The International Bank for Reconstruction and Development (one of the five member institutions of the World Bank Group) is financing projects that countries do not think are worth paying a market rate of interest to finance. In the last thirty years, the world has changed dramatically, but the Bank has refused to change with it.

Colin Bradford
Brookings Institution

Development today is not the simple problem it was thought to be thirty years ago. The Millennium Development Goals (MDGs) are not simply the babble of bureaucrats; they came out of a series of UN summits at which the representatives of governments, civil society, and the private sector were present. Consequently, the MDGs represent the aspirations and goals of society. They have a certain political legitimacy and are not just the goals of technocrats from the World Bank. They demonstrate that the reduction of poverty necessitates action across multiple fronts: health, gender equality, education, and the environment.

Therefore, the Bank confronts a complex task. Critics should not fault the Bank for doing too much, but they can fault it for not doing enough to push the MDGs. At least 40 percent of the world's poor live in middle-income countries. The Bank must therefore engage these countries. Today, one billion people live without potable water; two billion do not have electricity. Two point six billion people live on $2 or less a day. The global challenges in energy, health, and poverty over the next fifty years are immense. The Bank will play an indispensable role in confronting the greatest challenges of humanity.
 
AEI interns Amy Kaufman and John Nelson prepared this summary.