Reforming the World Bank: the continuing story of a failure foretold?

December 8, 2015
Reforming the World Bank: the continuing story of a failure foretold?
Richard Woodward
Richard Woodward Non-Resident Fellow - International Economics

Since 1944, the World Bank has been the pre-eminent institution in multilateral development finance. Its unrivalled capacity to mingle financial muscle with expert knowledge of development issues has kept at the forefront of international efforts to alleviate the suffering of the world’s poor including, currently, commitments under the rubric of the UN’s Sustainable Development Goals to eliminate extreme poverty by 2030. Nevertheless, in recent years disapproval of the World Bank has intensified. Faced with these challenges Jim Yong Kim, the 12th World Bank President, has set about reforming the organisation. Unfortunately these modifications are being undertaken with scant regard for the World Bank’s history, especially the lessons that might be derived from past attempts to overhaul the organisation. Many of the changes are sensible responses to the World Bank’s evolving environment. Nonetheless, their efficacy is offset by a process that is disrupting the organisation, lowering staff morale, interrupting programme delivery and wasting resources.

Much of the persistent criticism of the World Bank stems from the poor overall performance of its projects (which even internal reviews concede are often unsustainable or do not meet their objectives) and their insensitivity to their non-economic repercussions. A recent report by the International Consortium for Investigative Journalists, for example, claims that during the last decade World Bank projects have displaced almost 3.4 million people, often in direct contradiction with the bank’s resettlement policies. Dominated by developed countries, most notably the United States which has a effective veto over major decisions, the World Bank’s governance structures are also a perennial concern. The rising power’s frustration at their inability to secure substantive renovations to the World Bank’s governance structures has manifested itself in their creation of parallel institutions such as the New Development Bank and, as previously discussed at TRENDS, the Asian Infrastructure Investment Bank (AIIB). Additionally the conditions that once guaranteed the World Bank a steady stream of business, namely the inability of developing countries to access cheap capital and economic expertise, no longer hold. Today, private financial flows and contributions from philanthropic organisations dwarf the World Bank’s lending commitments. While many of the least developed countries still seek World Bank assistance the middle-income countries, long its best customers, now fund their development programmes by tapping commercial markets. Likewise the World Bank’s voice as a development ‘expert’ now competes for attention alongside a host of think tanks, universities, research institutes, charities and other international organisations.

Given this background, the clamour for World Bank reform has grown. Predictably headline grabbling proposals such as ending the US stranglehold on the Presidency or significantly boosting the power of developing countries in the organisation have run aground.  Jim Yong Kim has instead embarked on operational and managerial reforms designed to make the World Bank more relevant and responsive to its clients. To this end, the World Bank convinced its members to enhance its financial firepower. In December 2013, countries pledged $51.9bn to the largest ever ‘replenishment’ of the International Development Association (IDA), the World Bank’s concessional lending arm for the poorest and least developed countries. In this sector the World Bank has few competitors and plays a crucial role in providing finance to countries for projects from which private investors recoil. This extra money will sustain IDA commitments to these countries, which have already expanded from $14.8bn in 2012 to $22.2bn in 2014. Today almost three-quarters of the world’s poor inhabit middle-income countries, and wooing these states back into the World Bank fold is vital if it is to deliver SDG obligations. Thus, in April 2014, the World Bank announced measures to bolster the part of its organisation tasked with addressing the development needs of middle-income countries, the International Bank for Reconstruction and Development (IBRD). The IBRD raised the Single Borrower Limit for Brazil, China, Indonesia, India and Mexico by $2.5bn, elevated the minimum equity to loan ratio and altered some loan terms to make them more generous. Collectively these changes immediately enlarged the IBRD’s annual lending capacity by $10bn to $25bn. The munificence of these initiatives should not be overstated, however. For instance, the IDA replenishment is a record in nominal terms but in real terms its funding remains broadly flat and only sufficient to maintain lending commitments at 1980s levels.

More controversially, Jim Yong Kim has refurbished the internal organisation of the World Bank. For many years, the World Bank was structured around dedicated country offices belonging to one of six geographical regions. In April 2013, the President announced that the regional arrangement would be superseded by a thematic system pivoting around 14 ‘global practices’. Whereas previously the World Bank’s officials would advise a nominated country or region now they would be expected to counsel any country seeking guidance in their area of specialism. A second round of reorganisation was unveiled in May 2015 whereby the fourteen global practices units would be placed into three groups, each overseen by a senior manager.

These adjustments were designed to enable the World Bank to respond more rapidly to client demands, which were often similar irrespective of their geographical location. Moreover, the country/regional level focus was felt to restrict cross-country and cross-regional collaborations even in cases where neighbours confronted identical problems. According to Kim, World Bank staff spent less than 1% of their time assisting countries and colleagues from other regions. In effect, the ‘World’ Bank was balkanised into a series of regional banks resulting in the duplication of tasks and inhibiting its ability to contribute to the mounting number of development challenges that call for genuinely global responses. The emphasis on thematic expertise would, it was claimed, allow the bank to capitalise on its continued comparative advantage as a ‘knowledge bank’. Middle-income countries may well have access to alternative sources of development finance, but remain critically dependent on the World Bank’s unrivalled repository of accumulated development knowledge. In this way the World Bank could remain relevant to these countries despite the decline of its financial clout.

Anyone familiar with the World Bank’s history will be unsurprised to discover that these reforms have aroused considerable disquiet. This reflects doubts about the purported benefits of these plans and anger resulting from the clumsy way in which the process has been handled. Critics of the changes point out that in its early years the World Bank was organised thematically but this was altered because, amongst other things, insufficient attention was paid to country realities. The virtue of placing country offices at the heart of the system was that World Bank work was demand led and programmes sensitive to local needs. Now the sense is that operational priorities will be determined and imposed from the World Bank’s headquarters in Washington D.C., something that has given rise to accusations that the organisation is adopting a “colonial mind-set”. Confusion also surrounds the apportionment of responsibilities between the country offices, which still exist, and the global practices units. The diminution of the country offices risks atrophying a vital artery through which requests for World Bank programmes are articulated.

A project that promised to cut the World Bank’s operational budget by $400m and axe 500 jobs was always likely to cause rancour. Even supporters of the global practices reforms concede however that the mishandling of the process by the senior management has exacerbated animosity to the proposals. Staffed as they are by experienced technocrats well versed in the chicanery of institutional politics and abetted by key states interested in maintaining the status quo, international organisations are generally resistant to wholesale reform and the introduction of such programmes often leads to perverse outcomes. Nowhere is this better illustrated than the World Bank. Kim’s initiatives represent the World Bank’s fourth major restructuring during the last thirty years and look destined to leave the same problematic legacies as their precursors. As Katherine Marshall has observed ‘the culture of sophisticated analysis ingrained in staff practice’ gives World Bank reform a ‘Sisyphean quality’ with attempts to streamline the organisation often resulting in greater complexity. The confusion surrounding the exact role of the country offices, a brief glance at the World Bank’s organisational chart or discussions of the new structure gives a sense of these difficulties. As with past reorganisations frequent staff reassignments are eroding institutional knowledge and resulting in a disillusioned and demoralised workforce. According to the latest World Bank employee engagement survey released in July 2015 only one-third of staff felt they clearly understood the organisation’s trajectory and a quarter thought that senior managers created “a culture of openness and trust”. This discontent hangs heavy over the institution and disrupts the development and delivery of programmes.

It is almost universally agreed that the World Bank is an essential component of the evolving landscape of global development finance but equally so is the need for serious reform. The full effects of the package initiated by Jim Yong Kim will not be felt for many years and it is too soon to fully judge its impact. By repeating the missteps of his predecessors, however, the President may aggravate some of the problems he set out to solve. Furthermore, although it is understandable why he has so far shied away from it, if Kim wishes to restore the World Bank’s standing he will have to wrestle with the thornier issues that lurk in the shadow of the US veto.