Making World Bank more relevant in today’s times…

Ngaire Woods (Dean of the Blavatnik School of Government) has a nice piece on future of World Bank, one of the Bretton Woods institution. The other one – IMF got a new lease of life during this crisis. But World Bank continues to flounder:

The World Bank is quietly sliding into insignificance, as its core fee-paying clients increasingly seek other lenders. If it is to survive, its management will need to streamline its loan approval processes and leverage the unique assets that distinguish it from its competitors. 

The Bank once comfortably earned enough to be self-sustaining. Today, it is rapidly becoming welfare-dependent. Periodic contributions from wealthy governments have propped up lending to poor countries, but these are unlikely to be increased, and some may be discontinued as donors redeploy aid budgets to refugee programs. The problem is not that emerging economies have no desire to borrow; they desperately need funds for infrastructure and other investments. The problem is that the Bank is too slow to process loans, which has increasingly made it the last choice for many of its potential clients.

Whereas a commercial lender might take three months to prepare and disburse a loan, the Bank takes more than two years. And its efforts to speed up the process, which began in 2013, have reduced the average time only slightly, from 28 months to 25.2 months; in some regions (accounting for a third of the Bank’s lending), the wait has actually increased.

One clear indicator of the Bank’s performance is how high a premium governments are willing to pay to avoid it. A 20-year loan from the World Bank has an interest rate of about 4%, and the poorest countries can borrow for less than 1% (“International Development Association loans”). Nonetheless, many countries are choosing much more expensive commercial loans or bond issues. For example, Ghana, despite being eligible for IDA loans, recently chose to raise money from the bond market, from which it received an interest rate several times higher.

No wonder emerging economies are excited by the establishment of the BRICS countries’ New Development Bank and the China-led Asian Infrastructure Investment Bank: Both institutions have promised faster lending.

Together we can:

If the World Bank is to survive, its management must streamline its complicated and unwieldy bureaucracy, fixing what internal reviews described over a decade ago as “fragmentation, duplication, and delay” in assurance, safeguards, and fiduciary processes. At the same time, the institution must identify what it is uniquely positioned to do. In 2013, the Bank declared a new goal – to eradicate extreme poverty by 2030. But this makes it just one of a multitude of organizations seeking to address poverty.

What makes the World Bank special is that it is made up of 188 countries and can act on behalf of all of them, rather than being beholden to one or two. Furthermore, its financial structure enables it to be more autonomous, self-sustaining, and resilient than most other multilateral institutions. These are the attributes it must leverage.

…..

In short, the World Bank’s management and member countries need to work together to create a faster, more responsive institution, one that exploits its unique advantages to balance aid flows, provide counter-cyclical support, and offer meaningful advice. This approach could win back the fee-paying clients that comprise its self-sustaining resource base, provide it with its global reach, and allow it to continue to play a vital role in boosting economic growth and reducing poverty in developing countries.

Taking a leaf from discussions around global banking, should we break the World Bank into smaller banks as well? For global banks, the reason for breaking up is that they have become too big to fail. In case of WB, we don’t have such a problem. But like global banks, WB has also become too big and moves really slowly on decisions.

A bigger question is do we need a World Bank at all? We already have smaller regional development financial institutions (DFIs) which could do the job. Infact, they are pretty much the smaller world banks mentioned above and need to be refocused.

Some might argue let’s not have any of these International/Regional DFIs who just distort markets. Let the private financial sector serve all the needs..

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