China, India, Brazil and other middle-income countries (MICs) are appropriately using the financial crisis to push for reform of the Bretton Woods institutions, the global financial organisations established towards the end of the Second World War to help rebuild the world economy. In particular, they advocate changing the voting shares of countries on the governing boards of the International Monetary Fund and the World Bank to give emerging economies a greater say. The logic of such reform – the small countries of Belgium and the Netherlands until recently had the same weight as China – is undisputable. But, in the case of the World Bank, such changes alone will not fix much.
To understand why this is the case, one must look to events of recent decades. A vast gap has opened up between the practices of countries that have successfully grown and reduced poverty – the MICs – and the priorities of the World Bank and the aid community more broadly. The MICs have focussed heavily on getting right the basics, such as fiscal stability, infrastructure and agriculture, by setting priorities and sticking to these priorities. No country has more clearly demonstrated the wisdom of following this path than China. But with the Millenium Development Goals (MDGs) as the guiding principles, the World Bank and other donors have given little attention to such basics, have increasingly put the social cart before the economic horse and have adopted a faddish policy approach, constantly inventing new “flavours of the month”.
Consider the two examples of infrastructure and agriculture. All countries that are rich today invested heavily in infrastructure during their high-growth periods. But, starting in the 1980s, environmental and social non-governmental organisations (NGOs) in rich countries – supported by aid officials from wealthy countries – relentlessly attacked the World Bank’s work on infrastructure and modern agriculture. The results were bizarre. The bank’s lending for cheap, renewable hydropower, for example, fell by 90% over the course of the 1990s, while lending for agriculture has dropped by 75% over the past 25 years.
The MICs, however, took a different path and continued to invest in these areas, a move that led to continued growth and poverty reduction. The poor, aid-dependent countries suffered enormously both because of the priorities set and because of the continuous introduction of new initiatives.
One of the main reasons this situation was allowed to develop was the set of incentives embedded in the structure of the World Bank Group. Although the International Bank of Reconstruction and Development (IBRD) is the institution’s main lending arm – accounting for 75% of its disbursements in the form of hard loans – about half of the bank’s budget comes from donations from rich countries. Most of these contributions go towards the administration of the International Development Association (IDA), which provides virtually interest-free loans to help boost growth in the world’s poorest countries. IDA has become the tail that wags the IBRD dog – discussions at the IBRD board, where emerging economies will now have a greater voice, are not nearly as important as the closed-door negotiations of the permanent IDA.
Take the emotive issue of dams, for example. Rich countries have developed 80% of their hydro capacity, while Africa has only developed around 3%. The United States has 6,000 cubic metres of water-storage capacity per person, while Pakistan has 150 cubic metres and Ethiopia just 40. MICs find this gap immoral and have said so in discussions at the World Bank. When the issue was raised at the board in the late 1990s, the Bill Clinton-appointed US executive director did not speak up but immediately thereafter phoned the responsible vice-president, saying that if this were the position taken by the Bank, then it would be difficult to obtain support for IDA from the United States government.
A silver lining to this dark cloud is that the MICs are now partially filling the gap left by the World Bank and others. In recent years, the World Bank has only financed two major dams in the developing world, but China now finances over 200 such projects in Africa and Asia. This is a great service to the developing world. It would be even greater if China were to export not only its superb construction capabilities but also its world-leading capability in the sensitive area of resettlement. (To the surprise of many, the World Bank’s Independent Evaluation Group and others have shown that China has by far the best record in the developing world in resettling those who are relocated by large dams.)
What this all means is that changes in voting shares on the board of the World Bank will have little influence. What is needed is a fundamental re-engineering of the business processes and incentives to which staff respond. The first requirement is a major overhaul of the suffocating plethora of rules, or “safeguards”, which have been put in place over the last 20 years. The second is reform of the Kafkaesque independent “Inspection Panel”, which enforces these rules. And the third is a dismantling of the groups of staff who live off the transaction costs imposed by each of these rules.
The fourth necessary step is to put a firewall between rules which govern the IDA, where donors can impose what they wish, and the IBRD, where the bank’s borrowers sit. More broadly the MICs should use their new-found clout to force the World Bank culture to change from one in which managers and staff are pre-occupied with sins of commission, which are punished severely, and sins of omission are ignored.
John Briscoe is the Gordon McKay professor of environmental engineering at Harvard University. He worked for 20 years at the World Bank, where his last assignments were as senior water advisor and country director for Brazil. His role in reforming the World Bank is highlighted in Sebastian Mallaby’s landmark history of the Bank, The World’s Banker.
Homepage image from Consulate-General of China in Cape Town shows Liu Guijin, China’s special representative for African affairs, in Sudan.