World Bank’s corporate board determines flow of funds

I came across this interesting paper by Harvard Law School student Ashwin Kaja and HBS professor Eric Werker. The paper says that countries that serve on Banks’ board lead to more funding for their home countries! Here is an interview with Prof Werker. The abstract says it all:

We test for evidence of corporate misgovernance at the World Bank. Most major decisions at the World Bank are made by its Board of Executive Directors. However, in any given year the majority of the Bank’s member countries do not get a chance to serve on this powerful body.

In this paper, we empirically investigate whether board membership leads to higher funding from the World Bank’s two main development financing institutions, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

We find that developing countries serving on the Board of Executive Directors can expect an approximate doubling of funding from the IBRD. In absolute terms, countries serving on the board are rewarded with an average $60 million “bonus” in IBRD loans.This is more likely driven by soft forces like boardroom culture rather than by the power of the vote itself. We find no significant effect in IDA funding.

(Emphasis is mine).

This is much like what we are seeing in commercial bank boards as well. However, in C-Bank the members take it for themselves and in W-Bank for their own economies.

The paper explains how world bank corporate board is formed:

 The World Bank is structured like many major corporations and banks. However, it is solely owned by countries, which serve as its shareholders. The IBRD currently has 185 shareholding member countries while the IDA has 166. Each member country is required to purchase a certain ‘quota’ or number of shares based on a special formula that essentially accounts for its weight in the world economy (Woods 2001). The shareholders are technically the ultimate authority in Bank decisions. 

 

 As having a board that includes all member countries would be unwieldy and inefficient, the Articles of Agreement establish a procedure by which multiple countries are represented by one executive director. Five of the original twelve executive directors were to be appointed by the five largest shareholding countries. The remaining seven would be elected by the Bank’s member countries and serve two-year terms.

The election of executive directors generally occurs every two years at the Bank’s Annual Meetings. Each member country’s governor may cast the number of votes allotted to his or her country (see Section 2.1) for one candidate. The seven candidates receiving the greatest number of votes are elected as long as they each receive at least 14 percent of the total vote.  Since the founding of the Bank, the number of elected executive directors has been increased by the Board of Governors from seven to 19, leading to a total of 24 today.

Given this framework authors then study whether those elected lead to higher funds for their economies. The relation they find is quite robust for IBRD but not for IDA. IDA has a different process for allocation of grants compared to IBRD.

I checked the tables given at the end of the paper which shows the number of years a country has sat on IBRD Board (as relation is not robust for IDA, i ignored it). Quite a few have not sat on board at all.  This is what the authors say. The problem is actually two- fold: One people who sit on the boards divert resources to their economies. Two most countries keep getting reelected and others are not given a chance. (India has sat on the Board in all the years with US, UK< Germany, Canada, France etc!). Here is a list of the current board members

Further Werker explains:

 Overall, the researchers say, the World Bank is quite well run—the issue is one of misgovernance, not malfeasance. “Ashwin and I highlight a setting in which fair institutions can generate unfair outcomes because the overseers of Bank funds are also the beneficiaries,” wrote Werker in an e-mail from Liberia, where he was conducting another study.  

 

The World Bank was a necessary subject for investigating such issues, continued Werker.  “While the consequences of bad corporate governance in the private sector can be quite large—misallocated capital, shareholder losses, and, in the extreme, financial crises—at the end of the day the investors by their nature have some tolerance for risk.

“In an aid organization, however, the costs of misgovernance are borne not by the investors but by the citizens of poor countries in terms of fewer new health clinics, schools, or technical advisors.”

It is not a new idea that politics drive the allocation of aid decisions. But the view of politics that we normally have is that donors like the United States, Japan, or France may reward their friends rather than simply disperse money where the need is greatest or the impact is highest. In this research project, Ashwin and I highlight a setting in which fair institutions can generate unfair outcomes because some of the overseers of Bank funds are also the beneficiaries.

Excellent research findings.  The paper is also written very simply and can be read very quickly.

Corporate Governance is being questioned in all types of organisations. Werker adds in the interview that World Bank people are yet to see this research as it is very fresh. Let’s see their reactions.