America and the Future of the World Bank
February 23, 2012
The recent announcement that Robert Zoellick is stepping down as president of the World Bank begins the short political process of finding a replacement. But it is also the beginning of the more important process of determining a relevant role for the World Bank in a changed world. There will be a significant amount of press about the “horse race” as to who will succeed him. That race is largely irrelevant, as an American will likely continue to serve as World Bank president. Far more important is moving the bank in directions that are in the interest of its shareholders, especially the United States, and that allow the bank to remain relevant.
Zoellick’s tenure has been marked by success, but his six “strategic themes,” which have governed the bank since 2007, will need to be reviewed by the next World Bank president given the change in global priorities. The instruments, procedures, and mindsets across the World Bank are no longer sufficient to address the changing global realities, including the lingering effects of the global economic crisis, the shifting needs of middle-income countries, and changes in shareholder control. The United States should use this moment to ensure that the bank remains an effective, if indirect, instrument of U.S. foreign policy by ensuring that it moves in a direction that addresses its changing operating context while furthering U.S. development and foreign policy goals.
The World Bank’s primary instruments are low-interest loans, interest-free credits, and grants; however, these might need to change as emerging donors gain clout. The bank’s current model rests on profits from lending by the International Bank for Reconstruction and Development (IBRD) to middle-income countries at a markup to cross-subsidize funding for loans by the International Development Association (IDA) to the poorest countries. Historically, poor countries needed World Bank loans, which enabled the bank to attach conditions (called “conditionality”) to the money. However, because this model is dependent on these countries continuing to accept loans, even as they can go to global capital markets for the same money, the bank is in an increasingly precarious position. It will need to restructure its financing and instruments to address the changing reality of its clients’ needs.
The World Bank is currently in a position of financial strength, which the next president should leverage to reframe the institution’s focus. In March 2010, World Bank shareholders pledged $5.1 billion of new paid-in capital as part of a general capital increase, with $1.6 billion coming from developing countries, which increasingly want to influence the bank’s operations. Concurrent with the capital increase, the voting share of developing countries grew from 44 to 47 percent, with the majority of the shift accounted for by increases in China and India’s representation. Investments in the World Bank from developing countries have become increasingly self-interested. While depending less on World Bank loans, these countries need the expertise, technical assistance, and private-sector insight the World Bank has to offer. To better serve its biggest clients, the bank will need to move to a consulting firm model and consider a 20- to 25-year phase-out of middle-income lending, with IDA taking on a bigger role in lending to poor countries.
There are four areas the new bank president needs to address. First, is the increasingly Africa-centric makeup of IDA-eligible countries as other countries graduate into IBRD lending, which leads to questions about the division of labor between the World Bank and the larger “aid architecture”—including regional development banks, “vertical funds,” private actors, and bilateral donors. The United States should take advantage of the World Bank’s strong financial position and the current restructuring of U.S. development finance institutions to reassess how best to allocate limited U.S.-based development funds to accomplish strategic priorities. In some cases, the United States should “outsource” some of its development work to the World Bank. As the United States closes aid programs in middle-income countries, many of which no longer need direct bilateral assistance, the responsibility for addressing the shrinking development challenges in these countries could shift wholly to the World Bank and the regional development banks, with explicit dates for complete graduation from all assistance over 10 to 20 years. The United States might also outsource a number of “global public goods,” such as environmental issues, public health issues, and microfinance, as it chooses to do less as a bilateral donor.
Second, the new World Bank president should look at where the bank could act as a “force multiplier” of U.S. efforts in private-sector development. This could mean an increased emphasis within bank operations and financing on creating friendly business environments and privately financed infrastructure in developing countries, based on precedents like the U.S.-sponsored Doing Business initiative and financing through instruments like the International Finance Corporation.
Third, the bank needs to become a much more effective player in conflict and post-conflict zones, which is an explicit part of its original intent and remains in IBRD’s Articles of Purpose. While significant progress has been made by the bank since the conflict in the Balkans, it is still not equipped to work in conflict zones. Significant investments and incentives need to be changed in order to move the institution in a way that fosters functioning governments in post-conflict situations.
Fourth, the bank should seek to indirectly support U.S. development efforts around building democratic governance structures in developing countries. In the case of a renewed U.S. democracy and freedom agenda over the next four to eight years, complementary interventions by the bank that increase the accountability of client country governments to publics could play an important role. The World Bank should set up new programs to help client countries develop governance structures, as well as tough anticorruption programs. In a speech last April, Robert Zoellick outlined a framework for the protection and development of civil society through the World Bank’s instruments. This should be a priority for the bank. Specifically, as a “neutral” actor, the bank should play an important and constructive role in the historic and long-term changes coming about in the Middle East and North Africa as a result of the Arab Spring.
The World Bank and other international finance institutions are important instruments for promoting U.S. development and wider foreign policy goals. The bank effectively leverages U.S. taxpayer dollars, along with the contributions of other shareholder nations, to promote stability and alleviate poverty worldwide. Given a potentially diminishing political appetite within the United States for international development assistance, the World Bank could become an even more important instrument in supporting the U.S. development agenda. The United States should ensure that the bank takes advantage of new opportunities and addresses its current challenges, while furthering U.S. development and foreign policy goals through the governing agenda of the next World Bank president.
Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2012 by the Center for Strategic and International Studies. All rights reserved.