TCS Daily


The Increasing Irrelevance of the World Bank

By Desmond Lachman - May 14, 2007 12:00 AM

All the sound and fury concerning Paul Wolfowitz' troubled World Bank presidency is distracting attention from the deeper questions about the World Bank's continued relevance in today's global economy. What sense does it make for the World Bank to lend the major part of its resources to a handful of middle-income countries, which can more than meet their financing needs in the international capital market? And what basic changes might be needed in the World Bank's lending strategy to the world's poorest countries to make the Bank more successful than it has been to date in lifting those countries out of poverty?

Despite the Bank's rhetoric to the contrary, under Mr. Wolfowitz' presidency little has changed regarding the disproportionate amount of money that the Bank lends to those countries which least need it. Indeed, the World Bank's own annual report highlights the fact that 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. And this was the case even though each of these countries is presently flush with foreign exchange and now has more than ready access to the private capital market.

China is probably the most egregious example of a country which should long since have graduated from World Bank borrowing. After all, China is now sitting on a mountain of over US$1 trillion in international reserves and is adding to those reserves at a mind-boggling rate of $250 billion a year. Meanwhile, as if to underline the superfluity of World Bank lending, China has embarked on an ambitious lending program of its own to a whole host of African and Latin American countries in its efforts to secure a more reliable commodity supply.

The World Bank lamely insists that it must stay financially involved in China if it is to have any influence on China's economic development. Never mind that the Bank's loan program to China is but a tiny fraction of the flood of private sector money flowing to China. Never mind that the Bank could better use those resources to materially transform the many African countries starved of foreign capital and lagging so dramatically behind the rest of the world.

Even more basic than the need to radically reorient its lending program away from the middle income countries is the need for the World Bank to fundamentally rethink its overall lending strategy to the less developed countries. For the World Bank appears to have very little to show for the many billions of dollars that it has channeled to those countries over the past sixty years.

Extensive research by scholars like Professor William Easterly of New York University conclusively show that those countries which have been the largest recipients of World Bank loans have performed no better, and oftentimes worse, than those countries which did not receive the Bank's favor. And to make matters worse, those countries like China and India, which have ignored the Bank's nostrums, comfortably outperformed those countries like Russia and Argentina, which were more receptive to World Bank advice.

To his credit, Mr. Wolfowitz did make the reduction of corruption a centerpiece of his mission at the Bank. However, he limited himself to halting Bank lending to Uzbekistan and but a few of the world's other most corrupt countries He did so even though by the Bank's own evaluation, as many as 54 countries, which are still recipients of World Bank funding, are about as corrupt as Uzbekistan.

A more serious failing on Mr. Wolfowitz' part in addressing the global poverty issue was his tendency to compound the errors of his predecessor by ever-extending the Bank's mandate. As Professor Easterly correctly reminds us, beyond poverty reduction, the Bank's goals now extend to such open ended issues like securing children's and women's rights, promoting world peace, and attaining the Millennium Development Goals.

By extending its mandate, the Bank has not only lost focus on its primary goal of poverty reduction but it has also made it difficult to hold the Bank accountable for its core activities. This has to make one wonder whether the world's poor would not be better served by a less grandiose World Bank which narrowed its focus to objectives that were truly relevant to poverty reduction. These narrower goals might include the eradication of debilitating illnesses like malaria, feeding the hungry, and supplying clean water.

It would be a crying shame if Mr. Wolfowitz' forced departure from the World Bank were to prove to be a victory for the entrenched interests in the Bank that are rigidly opposed to real change. For the world still very much needs a World Bank. However, it needs one that is truly focused on effectively addressing the world's poverty problem.

The author is Resident Fellow, American Enterprise Institute.


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12 Comments

Best just to wash our hands of the whole affair
"What sense does it make for the World Bank to lend the major part of its resources to a handful of middle-income countries, which can more than meet their financing needs in the international capital market?"

More to the point, what sense does it make for the World Bank to be run by an American, when the administration he comes from does not believe in the mission and when American sources do not contribute a significant share into the Bank's fund?

Far better to just abandon the Bank. That way those who are happy with its policies can dominate, and continue to contribute funds for development under any guidelines they prefer.

Wow
How "free market" of you!

Imagine, choosing what government programs we want to contribute to. What a world!

Not our baby
Are you saying you think the WB is a US government program? You might want to check your info.

We don't own it.

http://www.globalexchange.org/campaigns/wbimf/origins.html

Who pays?
We don't own the UN but the USA provides most of the funding.

All US funds to the WB come from private sources?

Thirty percent not equal to "most"
Like the UN, the WB may have benefitted from American sponsorship fifty years ago. But it is quite capable of standing on its own now. A majority of its current funding is provided from foreign sources, with the US only enjoying a 30% share in the investment, and thus the say.

The United States should feel free to decline further investment, give up its hold on the presidency and let the world go on about its own business as it sees fit. If others want to keep the institution alive they can put their Euros where their inclinations lead them.

It will still be the world's bank, and anyone can decide whether or not they care to deposit their funds into it or borrow funds from it.

30% of WB funding is from US Taxpayers?
That's an "investment"?

Full agreement
We should abandon the WB and while we are at it I believe Roy's criteria should be used to measure our involvement in the UN. Meaning we should abandon it as well.

who runs
roy seems to feel that only a country that contributes more than 50% to the world bank, should run it.

In which case, no country would run it.

Of course, countries don't run the bank, the put up candidates for the presidency of the bank.

Roy seems to think that the fact that the US puts up by far the largest percentage counts for nothing.

Of course, roy believes that the US should count for nothing in general.

Going our own way
Thanks-- it's not often we do agree. But with both organizations we would do better without them, and they would do better without us.

I notice in Latin America they are already going independent. They are putting together their own development bank, so they don't have to rely on either the Americans or the Europeans for loans. It's a good trend.

China and India Middle Income?
In no way shape or form are China or India middle income countries. While they are growing rapidly, they still have per capita income levels that make them poor.

In addition, Since China, Brazil, India, Mexico and Turkey have approximately 2.7 billion of the world's 5.3 billion non-rich country population, why shouldn't half of the lending go there?

China's lending, not borrowing
China is a middle income country with a population of 300 million-- attached to an indigent, fourth world country of one billion poor people.

China also squirrels away their money like crazy, much of it in T-bills and American bond issues. They must have been very insecure at one time to have such a fixation on savings. So they are not in need of any development loans.

In fact, China is a significant subscriber to the World Bank.

"As of June 1, 2005, China had subscribed $4479.9 million dollars to the World Bank's International Bank for Reconstruction and Development. That amount is 2.85 percent of the total amount subscribed. China has 45,049 votes, which is 2.78 percent of the total number of votes."

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,contentMDK%3A20613411~pagePK%3A1497618~piPK%3A217854~theSitePK%3A318950,00.html

Similarly, India has a large emerging middle class, as does Brazil and Mexico. If they want loans there are many places they can look for the money other than the World Bank.

Actually, a very good investment
The United States can't lose either way when they offer development loans to third world nations. If they get paid back, fine. Their money is making money.

And if they don't, they can demand "structural reforms" that put that country in our pocket either forever or until the country gets tired of being in thrall and revolts, whichever comes first.

True, the taxpayers never see any gain. But don't you think the international banks made money on Argentina? I think they did. And the WB was an instrumental part of the plan.

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