TCS Daily

The Case for the World Bank

By Nathan Smith - May 17, 2007 12:00 AM

In the wake of the recent "scandal," existential questions are being asked about the World Bank. Desmond Lachman, in these pages, questions "the World Bank's continued relevance in today's global economy." Lachman ultimately thinks "the world still very much needs a World Bank," but others do not. For columnist George Will, the Wolfowitz scandal is a "silly but useful" occasion for the world to notice that "the bank's rationale, never strong, has evaporated." That's always been the libertarian line. Small-government conservatives who have thought it through may agree.

Let me present a case for the other side: that the World Bank is an institution which, if it did not exist, would be worth inventing. Even more important, I will try to throw light on what the World Bank, an institution little understood by the public, is and does.

Full disclosure: I have been employed for the better part of the past four years at the World Bank on short-term contracts. The views expressed reflect that experience. But of course they are entirely my own, and do not represent those of the World Bank.

Basic Government Functions

Even conservatives like George Will want the government to play some role in the economy. In education, conservatives agree that government should at least finance primary and secondary education, even if some would prefer that financing to be channeled through vouchers. Conservatives want the government to provide roads and a stable currency, and to enforce contracts. Most support some regulation of competition and finance. Most would agree that government should play some role in public health (e.g., sewers, litter, contagious diseases).

That list of basic government functions includes most of what the World Bank helps governments to do. So why is the World Bank even controversial?

A great merit of the World Bank is that it lies athwart the matrix of sovereign states. This is one of the things that makes it hard for the public to understand its function and purpose.

So it is helpful to think of the World Bank and its mission in the context of the world economy. World trade growth has outpaced world economic growth for decades, making the economy increasingly globalized. The result is anomalous: Production and trade are increasingly conducted on a global stage, while economic governance remains, for the most part, national in scope. The anomaly is partly rectified by international institutions like the World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO).

Nobody wants a United States of Earth, of course. And there's an economic as well as a political advantage to having lots of countries that run their economies in their own way: it creates policy competition. Countries with good business environments attract more economic activity, and other countries are forced to play catch-up. Case in point: French president-elect Nicolas Sarkozy won on a reform platform because the French could look at other economies and see that their model was not working. This is also why federalism is a good idea in the US: states can try out new policies, which can then be observed, copied or adapted... or not.

But it's good for business for some aspects of economic policy to be conducted over the entire relevant economic space, whether that be the United States, or the world.

Trade, Currency, and Miscellanious

Think how inconvenient it would be if all the American states erected customs barriers against each other and could exact any tariffs they wanted. We would all be poorer for it. The US constitution prevents this by giving Congress the power to regulate interstate commerce.

At the global level, the WTO has a similar role to play. By regulating tariffs and trade barriers, the WTO helps to prevent a contagion of beggar-thy-neighbor trade policies. Once, back in the 1930s, an outbreak of protectionism turned a US downturn into a worldwide depression. It could be even more devastating in today's more interdependent world.

Again, imagine that there was no Federal Reserve and all the states had their own currencies. Every time you crossed from Virginia to Maryland, or Nevada to California, you would have to change money. The Virginia-Maryland exchange rate would constantly fluctuate. All cross-border transactions would involve exchange rate risk. Speculators would trade trillions of Virginia, New York, and Nevada dollars in the currency markets every day. Sometimes a state's currency would crash, and its citizens would lose their savings.

Of course, this unsatisfactory situation still prevails in the world economy. The IMF was supposed to save us from it, not by providing a universal currency as the Federal Reserve does, but by supporting a system of fixed exchange rates. From 1946-71, under what was known as the Bretton Woods arrangement, you always knew how many pounds, francs, or marks you would get for your dollar next year. But Bretton Woods collapsed in 1971.

Since then, the IMF has tried at least to be a "fire-fighter," intervening to prevent disastrous currency crashes. It may be losing even that role. Developing countries seem to have been so unimpressed with the IMF's performance during the Asian crisis of 1997-1998 that many now prefer to self-insure their currencies by accumulating huge reserves of US dollars. In most developing countries, even those that still have their own currencies (El Salvador and Ecuador have adopted the US dollar as their currency), a large proportion and sometimes even a majority of bank deposits are denominated in dollars. This is one of the reasons the US trade deficit has grown so big: we're selling money!

So in the world economy, the real analogue of the Federal Reserve may now be, not the IMF but... the Federal Reserve.

If trade is the WTO's beat, and the IMF's is currency, the World Bank's seems to be "miscellaneous." It does infrastructure: builds roads and railroads, bridges and ports; upgrades power grids and gas distribution networks; promotes accessible drinking water. It does education: builds schools; helps draft curricula; provides textbooks; trains teachers; provides scholarships; expands and reforms universities. It does business climate: promotes property rights; eases licenses, red tape, and other barriers to entry; and ranks countries for "ease of doing business" in its annual Doing Business reports, to keep the pressure on. It does health care: builds hospitals and polyclinics, fights AIDS and malaria. It does governance reform: promotes transparency of public finance, helps to design and implement competition and procurement laws, assists with judicial reform. All this is done in collaboration with national governments.

There is no analogy to the World Bank in the US federal model. Instead, another pair of analogies can help to illuminate it.

Arbitrageur of Good Policy Practice

First: in the 1990s the New York Police Department under police chief William J. Bratton developed more effective crime-fighting tactics which drove down the crime rate. Later, some New York cops got high positions in other city police forces that hoped to emulate the NYPD's success. Now hold that thought.

Second: think of a multinational corporation. Coke invents a soft drink that people like. It would be stupid for Coke only to sell it in the United States. Coke would make less money, and foreigners would miss the chance to enjoy it. So Coke sells its beverage everywhere. Or when Honda develops a great car, they don't sell it only in Japan. They go global, giving customers worldwide a chance to drive it.

Now, the NYPD, Coke and Honda, are all examples of diffusion of good ideas: an idea is developed in one place, its merit is recognized, it spreads elsewhere. Diffusion of ideas is helpful in both the private and public sectors, but the process is more straightforward in the case of Coke and Honda. The NYPD cannot set up shop in Providence or Miami and sell its crime-fighting services. Policy is run by governments, and governments have jurisdictional boundaries.

Governments everywhere share many of the same objectives, and face many of the same problems in realizing them. Spreading good ideas about how to reform a school system is as useful as spreading good ideas about how to make a soft drink. But if a superintendent in, say, Poland comes up with a great new way of supervising teachers, his school system cannot do an IPO and then open subsidiaries in Cambodia and Pakistan and Rwanda to spread its good idea. Nor is it feasible for the Cambodians or Pakistanis to hire Polish superintendents to bring them the new-and-improved techniques, the way Providence and Miami might hire NYPD cops. For one thing, Poles don't speak Urdu.

This is where the World Bank comes in. World Bank staffers, a multinational lot to begin with, are constantly being shuffled from region to region, and exchanging views with colleagues working on other countries. So when they go into meetings in ministries, they are listened to because they bring the voice of international experience. In short, the World Bank is an arbitrageur of good policy practice.

But aren't we talking about a "bank" here? What does all this have to do with lending?

Two Kinds of Lending

It is instructive to ask: If the World Bank were being created from the ground up today, would it be a lending institution at all?

As an alternative, the "knowledge services" of the World Bank might be run more like a consulting firm, solving specific problems in return for fees, or like a university or think tank, doing original research to develop policy ideas which developing-country public officials could then be trained to implement. Aid might take the form of grants.

But when the World Bank was founded, people thought that what poor countries needed was not better policies, but simply capital. Supply them with the capital they need, and their economies would grow, so that it would be easy to pay the money back later. That worked in Europe, the Pacific Rim of Asia, and some other places. But where growth failed to occur, and countries ended up still poor, and now, to add to their problems, intractably indebted.

Probably, in these countries, loans were not the best form for aid to take.

If lending to the poorest countries is more problematic than it sounds, lending to middle-income countries is less so, because these loans are not made on concessional terms. Desmond Lachman criticizes the World Bank because "in 2006 over 50 percent of the Bank's lending went to as few as five middle income countries— Brazil, China, India, Mexico, and Turkey." But Lachman fails to mention the all-important distinction between (non-subsidized) IBRD loans and (subsidized) IDA loans. Four of Lachman's five—all but India, which, with a GDP per capita of $730 in 2005, is not a middle-income country but a poor country—are IBRD borrowers. IBRD borrowers do not drain the World Bank's money but, on the contrary, replenish it by paying higher interest rates than the World Bank pays on its own bonds. Annual transfers from IBRD cross-subsidize IDA loans. Eligibility for subsidized IDA aid depends on GDP per capita being below a low threshold (US$1,025 in 2007).

One reason that middle-income countries keep borrowing from the Bank is to "leverage" technical assistance. In effect, they pay for the Bank's knowledge services by borrowing and thus creating a revenue stream for the Bank.

For Better or Worse?

Which leaves the big question: Does it work? Does the World Bank's money and policy advice actually help the poor?

There have been many attempts to measure the effects of aid through regression analysis. Frankly, this approach is beset with intractable econometric problems such as endogeneity and omitted variable bias. It does seem, though, that World Bank advice is no substitute for a government with its own development vision. The best-performing countries, like China, have their own agendas and take World Bank advice selectively. When the government is at a loss to deal with the country's problems, as in Russia in the 1990s, it may be superficially more cooperative, accepting proposals from the World Bank for lack of better ideas, then lacking the will or the capacity to implement them. Also, in the first decades the World Bank abetted the wrong turn towards big government that was taken by most post-colonial nations. When Jawaharlal Nehru was nationalizing the "commanding heights" of the economy and emulating Soviet-style planning, the World Bank was eager to help.

Since then, however, the World Bank has undergone two revolutions, one intellectual, one operational. The intellectual revolution was the turn away from Keynesianism, from seeing big government as the solution to seeing it as, in many cases, the problem. Just as important was the recognition, based on the success of East Asia, that globalization is the high road to economic growth. The operational revolution was the work of President James Wolfensohn, a high-powered business consultant who came to the World Bank from Wall Street bringing many aspects of the New-Economy American corporate model, with its flattened hierarchy and its emphasis on information technology and institutional learning. Wolfensohn made the Bank more versatile and less insular.

Since the 1990s, the World Bank's raison d'etre is not to allocate capital but to influence policy. What may be evidence that the approach is working is that developing countries are booming. Since 2003, overall growth in what the IMF calls "other emerging markets and developing countries" (i.e., not including the "newly industrialized countries" of East Asia) has been over 6.5% per annum. Sub-Saharan Africa grew 5.6% in 2005, 5.5% in 2006; central and eastern Europe at 6.0% (2005) and 5.7% (2006); the post-Soviet countries at 6.6% (2005) and 7.7% (2006); the Middle East at 5.4% (2005) and 5.7% (2006); Latin America at 4.6% (2005) and 5.5% (2006); and developing Asia at 9.2% (2005) and 9.4% (2006). For the first time in decades, all regions of the developing world are moving forward and closing the gap with the rich countries. High commodity prices are one reason for this, but improvement in the quality of policy seems to be playing a role, too.

How much credit for this, if any, should go to the World Bank, is hard to know. But the World Bank is part of the world's economic machinery, part of the thin web of global economic governance in a roaring world economy. At a time when the world economy manifestly ain't broke, why try to fix it?

Nathan Smith is a writer living in Washington, D.C. He blogs at The Free Thinker.



"Nobody wants a United States of Earth, of course. "
Why not?

The thirteen colonies were once soverign states.

They agreed to follow a Constitution which was intended to provide a basic framwork for trade and basic rights, but allow for regional differences.

What would be so wrong with adding other countries to the the United States as long as the Consitution is followed?

A USofEarth
There's a lot of argument about whether the Supreme Court IS following the Constitution, or whether it's become a government of Nine, by the Nine and for the Political Wind.

Besides, someone else may make something else work better. And there may be people who don't want to live in a place where it takes two years to bring a simple case to trial. As C.S.Lewis wrote in The Four Loves, if we really love our own homes, we'll appreciate why they are different from our neighbors', and understand our neighbors' loves for theirs all the more.

'Nathan-Smith'd' again = TCS 'punk'd' again
Regardless of any flowery language the fellow uses, he will always remain a fringe anti-American open-borders radical.

The World Bank is no better than the UN - a corrupt, bloated, egregiously inefficient entity which makes claims regarding the reason for its existence, but the reality is that it exists only to serve itself, and to serve any and every anti-American agenda anyone in the world may seem to have.

The ugly jealousy of the rest of the world towards one of the only truly successful affluent nations left on Earth (China, Korea, Dubai, some others)is growing more and more apparent every day. It's to the point now that these 'people' are becoming openly offended and hostile by our refusal to commit suicide in order to appease them.

I will never understand why TCS allows this guy to write on their pages. He is the embodiment of an antithesis of what TCS stands for.

This isn't a liberal forum
We do not exclude opposing views.

>"I will never understand why TCS allows this guy to write on their pages. He is the embodiment of an antithesis of what TCS stands for."

Because it is useful to understand the other side of every argument. The author has provided it and has done so in an intelligent way.

That being said, the author tries to pass off a rather mythical version of the WB where they flit about the globe spreading good ideas that help impoverished countries. If only this were so. I don't believe the WB has come to an argreement on what defines a "good idea" in a long time.

The WB is a failure. If it were an actual business entity they would have had to close their doors long ago.

Nice platitudes, little reality
The WB, like all beaurocratic institutions has evolved to serve the interests of those who fund it, and those who run it. Whether it helps anyone else no longer matters.

Utterly Unpersuasive
What was it again that the World Bank does to help? Where are these things that the World Bank does NOT provided in the free market?

How does this institution meet its goals and the interests of its funders and beneficiaries?

Can we have some specific case histories?

Sorry, this is all glowy words and warm feelings and no meat.

I was trying to illuminate what the World Bank OUGHT to do...
... not whether it actually does a good job of it in practice. That's very hard to say. In this article I barely scratch the surface of that issue. But at least I hope I demonstrated why there is a rationale for the World Bank to exist.

The Middle Way?
I started reading this thinking that it would be just another apologia. But I found myself agreeing with a some of Nathan's underlying notions. It may be that Nathan is a little star-struck (buck-struck?) by his employment. When one is diligently working to do good, it is easy to praise the entity signing your check.

The UN should be shut down tomorrow and sent packing to Geneva. And the IMF should also be shut down too. It has simply lost its purpose. But it is not so clear about closing the entire WB.

Now there are a lot of alternative institutions that could handle WB and IMF activities better in specialized areas, such as health and the WHO. In fact the social agenda of the WB can be far better handled by NGOs and much of the WB should be converted to a global Social Fund which would make loans or grants to NGOs to do good.

And for major infrastructure give private companies a BOT (build operate transfer) license and let them recoup the costs through user fees. It won't work for a country road but it sure will work for a highway, or rail system or a container port. You want policy reform? Have some government minister sit across from a Bechtel lawyer for a week trying to work out the terms of them investing $100 million in some bit of infrastructure.

The most compelling argument for keeping the WB is, exactly what Nathan says; dissemination of ideas, data, history etc. And Nathan is also right that for middle income countries, they pay for this advice, some of which is actually quite good (the "Doing Business" series, for instance).

But the WB lacks a truly coherent development theory and strategy which should all be about growth. WB princelings are far too free to promote their own (often truly silly) ideas. After all, the only thing that works is self-sustaining growth over time and in history that has never come from countries on the foriegn aid dole (name one). Only those who were off the dole (Chile, South Africa, Taiwan, Singapore) have graduated and poor South Africa started slipping back into the mire after qualifying for aid post-apartheid.

Nathan implicity asks us readers, how to do it right? My answer is to look at the Millenium Challenge Corp model. They give grants to help countries figure out their own path to sensible outcomes and then once they have a homegrown plan, they fund that, again with grants. Global MCC has a couple of hundred employees, not 13,000 (and no, I have no relationship whatever in MCC).

I'm dumbfounded
What a bizarrely vicious response. If Mr. Smith is not a patriot and a gentleman, I hesitate to speculate on who might qualify in WesleyH's mind.

The US and other western countries already do the jobs of the WB.
The biggest similarity between the UN, WB, IMF, WTO etc is that tax payers get stuck with the bills. And for these taxes these institutions distribute their goodies to the governments that fund them and NOT to the tax payers.

Of course the organizations will say that life would be chaos without them.

The US and its trading partners are very much able to manage their own comercial relationships and do not need the WTO or WB telling them what to do. The western countries can also lend money without the help of these other institutions as well.

The impoverished world needs more capitalism and less international/national/provincial/local government. The extra/super government agencies are just more of what these poor people don't need.

Transnational NGO Dreaming
Hey, Woodrow, the League of Nations, UN, socialism and a lot of other institutions touted by brainwashed effete snobs lecturing the great unwashed OUGHT to have done a lot of wonderful things to bring utopia, but in practice gave us at best wasteful ineffectiveness and at worst gulags and mass murder.

Maybe your inability to make as wringing an endorsement of the WB as you provide for unlimited immigration is telling. You'd thing that a direct, recurrent and apparently significant financial relationship with the WB would buy it a better shill, no?

How did the WTO get in there?
How is the WTO distributing any "goodies"? If anything, the WTO is an international tool for breaking down governmental barriers to trade, amongst them government subsidies. I'd say it's thereby also a tool for putting money back in the taxpayer's pocket.

Right now between the US and the EU, farm subsidies amount to about the entire combined GDP of Sub Saharan Africa. That costs taxpayers money, pulls our economy away from our comparative advantage industries, and makes the US and EU markets inaccessible to African farmers, whose goods become too expensive. And at the end of the day food at the grocery store isn't any less expensive to us taxpayers. Repeat for all the other subsidized industries and one realizes we're wasting a whole lot of money to impoverish the rest of the world, and because of political realities only organizations like the WTO can really help us, since it plays different special interests from around the world against one-another, neutralizing them.

The WTO can only reduce government and government involvement in the economy, not create more.

WB - good idea?
why does the WB have to be an entity like the UN. if it is a viable organization with such good ideas why can't it exist as a private company.

this will test whether the ideas are really good or it is only a nice sounding mission statement that under performs

Cases full of money
The WB is a place where governments pump in a lot of money, to beaurocrats who then pump it out the other door. If they didn't do it, then they wouldn't have to steal so much money from their poor citizens. But many people just love this system of graft. I've read that there's at least one thousand beaurocrats at the WB that make just as much money as Wolfowitzs girlfriend. I challenge them to write in here and deny it, or justify why they could possible deserve it. Many people love the system as it is and don't want to see it changed, and that's one of the reasons those mostly envious anti-american eurotrash wanted to get rid of him; but not the corrupt system.

pushing vs riding - riders not needed.
"...the World Bank has undergone two revolutions, one intellectual, one operational. The intellectual revolution was the turn away from Keynesianism, from seeing big government as the solution to seeing it as, in many cases, the problem. Just as important was the recognition, based on the success of East Asia, that globalization is the high road to economic growth."

I'm glad to hear it. It is telling, however, that the WB is learning this AFTER the fact, and is effectively jumping on the bandwagon rather than pushing it. The fact that the aforementioned success in East Asia happened without direction or guidance from the WB clearly illustrates that the WB is, if not the irrelevant, certainly unnecessary.

The closing justification for the continued existence of the WB - that the world economy is working fine with the WB in place, so why fix it - is interesting. One could, of course, use the same logic to justify absolutely anything. The world economy is working fine with corruption, inefficiency, genocide, AIDS, terrorism, etc, so why fix these things?

Not quite the attitude you would expect from a bunch of do-gooders, looking for ways to make the world better place. Is the WB, who supposedly make their living by analyzing inefficient governments and advising them on creative ways of removing red tape and deadwood, really so uninterested in applying the same analysis to themselves?

I wonder if they give similar advice to the struggling governments they supposedly advise: "What's the problem? You are in power, the world economy is humming along, and there are no riots in the streets - why fix it if it aint broke?"

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