A fresh start needed

[ By Eckhard Deutscher and Qays Hamad ]

For the World Bank, the past two years were lost years, marked by poor management and strategic disorientation. Little progress was made on matters that affect the institution’s future. During his tenure, Wolfowitz focused too narrowly on fighting corruption and other issues of governance. These issues are important, of course, but they deal with only one problem area developing countries and the World Bank itself are facing.

Questions neglected so far include:
– What should be the World Bank’s role in middle-income countries?
– How can low-income countries be better supported in view of weak governance and low absorption capacities?
– How can the bank effectively support the provision of global and regional public goods?
– What changes are needed in the Bank’s structures and instruments, to remain relevant and effective in view of rapid change in many developing countries?

The World Bank’s Board of Directors has set up a working group to review the current strategy. The new president would be well advised to actively support this process from the outset. Zoellick should base management decisions concerning budget, staff and structure on the outcome of this strategic review.
Middle-income
countries

A number of middle-income countries (MICs) currently enjoy easy access to the private financial markets. Nonetheless, the claim that they no longer need World Bank support remains unconvincing, as it fails to take into account that private capital flows are pro-cyclical and volatile, and can easily ebb away again. Moreover, private loans are primarily used for projects which produce quick returns. However, this is mostly not the case for investments in social sectors such as education and health or for environmental protection. Moreover, 70 % of the world’s poor still live in MICs.

On the other hand, successful MICs are struggling with the side-effects of their growth. They require support in new fields like environmental protection, resource conservation or social security. It is in the interest of the entire international community for MICs to be stable, given their growing impact on the global economy.

In this context, the World Bank can make valuable contributions. For it to do so, however, it must better align its instruments to the situation and needs of MICs (Hamad, 2005). The following options would be relevant:
– sub-sovereign lending;
– local currency lending (to avoid exchange rate risks);
– financial instruments to protect against the volatility of commodity prices, interest rates and exchange rates, in order to avoid external shocks; and
– provision of fee-based stand-alone technical support, which is not linked to loans.

According to current growth projections, some 25 World Bank (IBRD) client countries will move up to the high-income countries by 2015. These include in particular EU-accession countries, some Latin American nations, South Africa, Turkey and Russia. It must be decided whether, when and how they will graduate and lose access to further World Bank assistance, or whether the Bank will continue to offer them support.

These questions are relevant for the Bank’s business model. Today, financial surpluses are transferred from the International Bank for Reconstruction and Development (IBRD), the main branch of the World Bank, to the subsidiary International Development Agency (IDA), which provides soft-loans and grants to the world’s poorest countries. The World Bank Group also serves as a “knowledge bank”, transferring expertise and best practise between countries. None of this will remain viable if a large number of progressing countries drop out.

Low-income countries

When dealing with low-income countries (LICs), the Bank is facing other challenges. It must increasingly act as mediator in donor harmonisation to keep different donor contributions together. Within this division of labour, it should focus on its comparative advantages such as fiduciary management.

In any case, the World Bank must stay the course it has adopted towards harmonisation and alignment in line with the OECD’s Paris Declaration on Aid Effectiveness. The World Bank should combine its instruments and products more creatively with contributions from other donors, for example, by linking funding and technical advice. This cooperation should start at an early stage, for instance when preparing joint studies or developing joint programmes. In joint programmes, the World Bank should be more willing to act as the junior partner where other donors are in a lead role.

What’s more, about 20 countries which are eligible for concessional support from IDA today may become MICs within the next ten years. They would then have to switch to loans from IBRD and blend-loans from IBRD and IDA. IDA’s clientele may then consist predominantly of fragile states, which typically suffer from weak governance as well as internal and external conflicts, something IDA would have to adapt to.

Global public goods

Communicable diseases, climate change and the provision and dissemination of knowledge are only three of many global challenges which affect poverty and impact developing countries. Consequently, they directly concern the World Bank. However, these issues cannot be tackled within country programmes, because national approaches are mostly not feasible, nor sensible. The same applies to issues like trade promotion, peace and security or the stability of financial markets.

Since the early 1990s the Bank has been involved in what are known as “Global Programmes”. However, this engagement is largely on an ad-hoc basis, and lacks a clear strategy, mainly because member countries disagree on the mandate. The Bank will present review of its “Global Programmes” this year. What is urgently needed, however, is a clear mandate for the Bank to promote global public goods (GPGs), in both technical and financial terms. At the same time, the roles of the regional development banks, the UN and other relevant institutions in providing regional and global public goods need to be clarified.

Moreover, it must be decided which GPGs are particularly suitable for World Bank involvement. That might apply to those with a direct impact on reducing poverty and achieving the Millennium Goals, or to those to which the Bank can make the most effective contributions.

The “Clean Energy Investment Framework”, a World Bank facility to promote access to sustainable energy and reduce greenhouse-gas emissions, illustrates the situation. Some countries challenge the Bank has mandate for climate protection at all. At the same time, it is not entirely clear how the Bank’s facility should cooperate with other institutions, such as the UN or the Global Environmental Facility.

Internal governance

There has been little progress in recent years in the debate on the World Bank’s internal governance. Options to improve the efficiency of the Board of Directors, its main decision-making body, have long since been mooted (Deutscher 2003). The size and composition of the Board are often criticised. A balance needs to be struck between efficiency, on the one hand, and legitimacy – in other words: representation of the member countries – on the other hand. However, the main question is whether the Board is currently focusing on the right issues and how the division of labour and responsibility between the Board and top management can improve.

The Board should concentrate more on strategic issues, monitor implementation, organisational efficiency, achievement of objectives, and approve business plan and budget. Projects and programmes should be dealt with at committee-level, and documents should focus on anticipated results and risks, rather than over-burden the Board with micro-management and details.
In return, the top management should assume more responsibility for operations on the basis of agreed objectives and procedures. The management currently has a tendency to refer back to the Board more often than necessary. Moreover, the executive directors are answerable only to their respective governments, but not to the institution itself. Therefore, issues of accountability arise.

On top of all this, the Wolfowitz crisis has revealed additional need for reform. First, the process for choosing the president and his or her immediate staff must be addressed. Moreover, the president’s channels for communication and instructions must also be clarified.

Conclusion

The World Bank must become better geared to serving its customers and their needs. Dramatic changes are on the horizon in both respects and the Bank must adapt accordingly. At the same time, the relevance of global issues is growing. Provided the political will of its members, the Bank should develop financial instruments for promoting regional and global public goods in line with its specific competitive advantages and mandate. Furthermore, it must improve internal governance as well as the cooperation with other donors.

The World Bank has embarked on a strategy review. Its newly assigned working group intends to answer pressing questions by the end of this year. Decisions are urgently needed for the institution again to be guided by clear objectives. At the same time, a broad strategy process may also help to boost the sense of ownership on the part of staff and management, and help overcome the Bank’s current crisis. The new president should take advantage of the new beginning, defining a new direction and giving staff a fresh sense of motivation.