Superb paper by Vikram Nehru of Carnegie Endowment for International Peace.
He asks whether both ADB and WB are needed in Asia:
This paper examines the complementary and competitive roles of the World Bank and the Asian Development Bank (ADB) in Asia given the backdrop of a changing world in which development priorities and challenges are changing rapidly and the rapid expansion of financial flows to developing countries is challenging the influence of these organizations. The paper highlights changes to the international aid architecture, its increasing fragmentation, the rise of non-traditional donors, and recent efforts at improving aid coordination. With this background, the paper examines the roles of the World Bank and ADB in Asia, provides some comparisons of their performance, notes their overlapping responsibilities, and explains current approaches to coordination and cooperation between them.
He looks at how Asia is changing due to economic developments. Then he discusses how WB and ADB compete with various other agencies to serve these roles. I am skipping all this and coming to issues facinf WB and ADB in Asia. There are three – relevance, governance and cooperation:
The first is the very fundamental issue of relevance. Given the declining role of official development assistance in overall capital flows to developing countries, and the diminishing role of multilateral development banks within that space, the World Bank and ADB should constantly re-evaluate the value they bring to developing countries through their operations. While there are biting critiques of aid in general, (Easterly 2006; Moyo 2009) within the international aid community, the overall assessment of the World Bank and ADB remains broadly positive.
The second key issue confronting both institutions is governance. This is perhaps more keenly felt in the World Bank—where there has been considerable concern that the voting structure does not represent the increasing influence of developing countries. Recent increases in the shares of developing countries, particularly the PRC, has raised the share of developing countries from 42.6% to 44.1% to 47%, still short of parity with the developed (Part I) countries. In addition, African countries were given an additional seat at the World Bank’s Executive Board to bring the total number to 25.
Interestingly, ADB seems to have fewer criticisms on account of governance—even though the economy of the largest shareholder of the institution, Japan, is now smaller than that of the PRC, which has much fewer voting rights.
Moreover, in the selection of the heads of the two institutions, the United States has come under considerable criticism for continuing to push for its nominee to become the President of the World Bank even when the United States is both the largest economy in the world and is the World Bank’s largest shareholder. Yet Japan has not been subjected to similar criticism, even though it is no longer the largest economy in Asia and yet remains the largest Asian shareholder, and the President of ADB has always been a Japanese national.
The third challenge confronting the World Bank and ADB in Asia is their relationship with each other in operational matters and in advising their Asian clients on development policies and strategies. Some would suggest that the comparative advantage of the World Bank and ADB differ. The former has a clear comparative advantage of working on global public goods (climate change, global trade negotiations, global migration, among others). The latter has an advantage in delivering regional public goods—such as the development of the Greater Mekong Subregion, the Chiang Mai Initiative, and support for the formation of the ASEAN Economic Community. Clearly, the two institutions can and must coordinate on all these issues, in part to reduce the cost of operations and the burdens of Asian clients, and increase their development impact
Can Asia afford both? Both have their advantages:
So what would be the optimal configuration of multilateral development banks supporting Asia? There are a number of ways to approach this question—through the theory of clubs, the theory of fiscal federalism, or through the theory of cooperatives (Kawai and Petri 2010; Casella and Frey 1992). All of them broadly lead to the same conclusion. The World Bank and ADB provide critical public goods that are partially (or wholly) non-excludable and non-rivalrous in nature.7 As such, the services they provide are unlikely to be replicated through private sector organizations. At the same time, these institutions, being cooperatives (formed by members to serve members and thereby achieve economies of scale) need to function in accordance with rules that ensure that the governance arrangements are acceptable to all members. The larger the number of members, the greater become the economies of scale, but also the greater is the likelihood of divergent interests among the membership and the greater the difficulty in fashioning a consensus.
In the case of the World Bank and other regional development banks such as ADB, the natural specialization would be for the World Bank to focus on removing barriers to global agreements on the most important global issues—such as trade, climate change, international migration, global financial stability, disaster management (including health pandemics and natural hazards)—working in tandem with the specialized global agencies responsible for each of these areas. At the same time, the World Bank, using the advantages of economies of scale could also be responsible for development research and global knowledge management, as well as mobilization of development resources for itself and the family of regional development banks. ADB, on the other hand, could focus on crafting regional agreements on public goods and services, such as support for the ASEAN Economic Community, regional infrastructure corridors, the Asian Bond Market Initiative, and the Chiang Mai Initiative.
Coordination is the key as both compliment each other:
But such a division of labor has a fundamental problem. It is silent on financing operations in countries and responsibility for the policy dialogue. Clearly, neither one nor the other institution could become solely responsible for this important role. If ADB were responsible, then countries would be deprived of the global knowledge and research findings of the World Bank. But if the World Bank were to be made responsible, then countries would be deprived of ADB’s regional expertise and its understanding of the relationship between regional initiatives and country development strategies.
There are issues with this coordination bit as well on account of governance. So it will be diffiicult but has to eb done to make both instis relevant for Asia.