The Greek scientist and philosopher Archimedes is reputed to have said: \”Give me a lever and a place to stand, and I will move the world.\” Well, the World Bank doesn\’t have a long enough lever.
Total outstanding World Bank loans are $152 billion. If one could magically take that $152 billion and distribute it outright to the 2.1 billion people who live on less than $3.10 per day, it works out to about $72 per person–which is a month or so of consumption even for these very poor people. If it is only the returns from World Bank loans are spread among those 2.1 billion people (an assumption that can be questioned), the gains to consumption would last longer, but also be much smaller.
There\’s not much prospect that World Bank funding will increase dramatically. So how can the bank choose a place to stand, so that it can leverage its resources as much as possible? Two papers in the Winter 2016 issue of the Journal of Economic Perspectives tackle this problem: Michael A. Clemens and Michael Kremer discuss \”The New Role for the World Bank\”, while Martin Ravallion explores \”The World Bank: Why It Is Still Needed and Why It Still Disappoints.\” Both papers, in related but different ways, argue that the World Bank needs to shift its focus.
The original idea of the World Bank at its founding back in 1944, in the aftermath of World War II, was that global capital markets were not very functional, and that in particular low-income countries were unlikely to have the access they needed to investment capital from high-income countries. Whatever the merits of that argument in the 1940s and 1950s, it doesn\’t hold up so well in the 21st century. The last quarter century has seen dramatic rises in international foreign direct investment, foreign portfolio investment, and in remittances that emigrants send back to their home countries.
Ravallion in his paper estimates that \”World Bank lending in 2012 represented only about
5 percent of the aggregate private capital flows to developing countries. Also, it\’s become fairly common to hear that certain low-income countries have borrowed so much that repayment of that debt has become a burden hindering their growth–which is pretty much the opposite of not being able to borrow.
In short, the idea of the World Bank as a major player in global capital markets for low-income countries no longer fits with the facts of the world economy. Indeed, Clemens and Kremer detail an estimate that if you just look at how of a subsidy the World Bank is offering low-income countries (which includes loans made at below-market interest rates and outright grants), \”total subsidy provided by the World Bank Group’s shareholders to clients overall is in the range of $11.0–14.2 billion per year.\” The alternative vision offered by the JEP articles is that the World Bank should use its loan and grant programs so that it has legitimacy as a player in development issues, but that the real leverage of the World Bank isn\’t from the money. Instead, the Bank\’s leverage, its place to stand, is to focus on policies for reducing extreme poverty (rather than being broadly concerned with helping economic growth) and with being a knowledgeable and trusted source of advice on what works.
But here the problem arises in thinking about the World Bank as a trusted source of knowledge about how to help the poor. In the post-modern 21st century, we are often quick view ideas like \”knowledge\” and \”trust\” as little more than pretty language designed to fool the suckers for long enough to impose a desired politics and ideology. It can be hard to work one\’s way around to a mature view that even though knowledge is almost never truly dispassionate or disconnected from politics, knowledge is still real and possible. Or to recognize that while trust should only be given conditionally and incrementally in matters of public policy and finance, trust can lead to working relationships that are far more smooth and productive than the perpetual embrace of mistrust.
The JEP authors are quick to note that the World Bank hasn\’t always acted in a way that would lead to it being regarded as a trusted source of knowledge. On the basic question of how the World Bank evaluates its own loans, Ravallion points out:
The first question we would surely ask of a knowledge bank is whether it establishes a sound prior case for its own interventions and systematically assesses whether that case turned out to be valid. The World Bank has not, however, lived up to this ideal. Evaluation is generally weak and unbalanced, both before and after implementation. This reflects a lack of focus on the welfare outcomes of projects and policies. Instead of studying the effect on its stated goal of poverty reduction, the focus tends to be on monitoring inputs—for example, schools built rather than education attainments … The Bank was once a leader in cost–benefit analysis, but this is no longer true. While the Bank’s operational directives call for cost–benefit analysis, it is not implemented for most Bank projects (World Bank 2010). The proportion of projects quoting an expected rate of return has fallen over time. Cost–benefit analysis has clearly fallen out of favor among World Bank staff and managers.
From the beginning, the World Bank had a political mission—to use aid to keep countries in the Western political orbit and to compete with the USSR for economic and political influence in third world countries—as well as a narrower economic mission. The political nature of the institution has continued. In particular, the United States has effective veto power over major Bank decisions, and Bank lending tends to follow the commercial and financial interests of the United States. Indeed, US officials explicitly demanded such behavior in recently declassified documents from long ago. Also, countries temporarily on the UN Security Council receive more Bank loans, and Bank projects may be used to reward countries for General Assembly votes that support priorities of the United States and other high-income countries. The United States has successfully intervened to limit Bank lending to some countries, including Iran.
Ravallion\’s paper offers a detailed blueprint for how the World Bank might reshape itself from being a \”lending bank\” to a \”knowledge bank,\” including its practices concerning loan-granting and evaluation, gathering and dissemination of data and research findings, policy advice, and other dimensions. Perhaps counterintuitively, if the US thinks that it\’s useful to have a World Bank that is viewed as knowledgeable and trusted, and not (primarily) politically motivated, then the US needs to loosen its grip on the bank. For example, the tradition that only a US citizen can be president of the Bank needs to end, and voting power in the governance of the Bank needs to be adjusted over time so that the emerging economies of the world have have bigger say.
This kind of advice seems eminently sensible, if perhaps harder than it sounds. But perhaps the hardest point is that if the World Bank is to use knowledge as its leverage to fight poverty, then it will need to actually take a stand on what works and what doesn\’t. And when the Bank takes a stand, it will inevitably inject itself into policy disputes where its motives will be called into question. Clemens and Kremer offer a list of examples of knowledge-based poverty-fighting policies that have been pushed by the World Bank in recent years. Here\’s the Clemons-Kremer list (citations omitted):
Agriculture. In the past, many African farmers could only sell to agricultural marketing boards that operated state-run processing facilities and paid a fraction of the world price for export crops. For example, Ghanaian cocoa farmers shortly after independence were only receiving 55 percent of what the board received for selling their produce; Kenyan cotton farmers in the mid-1970s were getting only 48 percent. This practice was common … The state also ran markets for inputs, such as fertilizer, often delivering them not at all, or only to politically connected farmers, or too late for planting. The Bank promoted liberalization of agriculture and these monopsonistic agricultural marketing boards are now mostly gone. …
Health. The World Bank promoted a shift in budgets away from tertiary-care hospitals in capital cities towards community health centers and rural clinics providing basic primary care—for example through Ethiopia’s Health Extension Program and Brazil’s Family Health Extension Program. Health budgets are now substantially more oriented toward primary care. At one point the Bank pushed for charging fees to at least certain categories of patients, although it has now backed away from this. It now frequently promotes the adoption of pay-for-performance programs within government health services.
Education. The number of out-of-school children and adolescents worldwide fell from 196 million to 124 million between 2000 and 2013 despite population growth over the period. The Bank has been an important part of the movement for universal primary education, and now that the vast majority of primary-school-age children in the developing world are enrolled in school, the Bank is shifting its focus to improving learning.
Social protection. The Bank has played an important role in the spread of “conditional cash transfer programs”—in which cash transfers to low-income households are linked to children attending school or seeing health care providers. After promising results from Mexico’s PROGRESA in the 1990s (now referred to as Oportunidades) and Brazil’s Bolsa Alimentação program, the Bank now supports conditional cash transfer programs in 26 countries. The Bank both financially supported national programs and vigorously promoted conditional cash transfer programs, including at international conferences convened for that purpose in Mexico in 2002, Brazil in 2004, and Turkey in 2006. The Bank’s researchers also played an important role in rigorously evaluating the impact of these programs, a factor in their rapid diffusion. Such programs have been found to reduce poverty and improve child health and education.
Regulatory policy. The World Bank’s Doing Business reports, which provide objective and internationally comparable measures of how different countries regulate the private sector, have been very influential in motivating countries to reduce regulatory barriers to establishing new firms.
Tax policy. While the International Monetary Fund has played a bigger role, the World Bank has supported the dramatic worldwide shift to value-added taxes, which have replaced other taxes widely considered less efficient. Since 1960, a VAT has been adopted as the main consumption tax in over 140 countries.
Trade policy. The World Bank, along with the IMF, has supported shifts from rigid import quotas to more flexible tariffs, along with reductions in tariffs and movements toward “unified” exchange rates in which the same exchange rates are applied to all types of trade. From the 1980s to 1990s, most World Bank adjustment operations were made conditional on trade liberalization. Tariffs and statutory barriers to business creation have declined dramatically. In India, for example, the weighted tariff rate has fallen from 54 to 7 percent between 1990 and 2009.
Conflict recovery. In post-conflict situations, the Bank has supported community-driven development programs and procedures for demobilizing and providing transitional support to ex-combatants, for example, in Bosnia, Cambodia, El Salvador, Lebanon, and Uganda.
Property rights. Since the 1960s, the Bank has supported land demarcation and titling programs in Armenia, Bolivia, Guatemala, Indonesia, Malawi, and elsewhere across the developing world. Thailand used World Bank support to partition and distribute land to rural residents. Whereas governments of developing countries once regularly appropriated private assets, they are now more likely to privatize state assets.
Few of us will be in total agreement with any list like this one. My point is that one\’s feeling about the World Bank as a knowledge bank and a poverty-fighting institution will depend in substantial part on whether you think this kind of list is mostly right or mostly wrong. Clemens and Kremer sum up their own views this way: \”Indeed, we do not agree with all of these policies or believe they were all well implemented, but we do agree with the general thrust of most of them and believe that they reflect mainstream views within the economics profession.\”