After Zoellick, World Bank faces uncertain future

Standing in a Tanzanian field, Christina Mwinjipe stares at a cassava plant that has been destroyed by brown streak disease. As 200 million African farmers depend on the crop, better known in the West as tapioca, this disease could exacerbate problems of hunger and malnutrition on the continent. Together with cassava mosaic, it causes more than $1 billion of damage a year. For Mwinjipe, this means eating into her savings to buy cassava to feed her three children. Fortunately, help is at hand in the unlikely form of Microsoft billionaire Bill Gates. The Bill & Melinda Gates Foundation is spending $1.2 million on research into tackling the viruses that attack cassava. “There is a scientific innovation that lets us change the cassava crop so it is not susceptible to this disease,” Gates said during a recent visit to London. “It will take another three years to get these out into the field, but it is clear it is going to make a huge difference.” Meanwhile, in neighboring Uganda, the World Bank too is spending money on cassava, investing $30 million in improving production. A few decades ago, the World Bank — perhaps with other multilateral institutions — occupied this territory alone. Now, it looks very crowded. The bank’s emerging rivals The bank, which celebrates its 68th birthday this year, faces challenges its founding fathers could not have foreseen. In 1944, even amid postwar devastation, developed economies’ share of global gross domestic product was about 80 percent, with the United States alone accounting for more than 40 percent. By 2050, according to Goldman Sachs, the four emerging economies known as BRIC — Brazil, Russia, India and China — will account for more 40 percent of the world economy. One can quibble with the figures, but few argue with the premise that this makes for a radically different environment for the bank to operate in: Emerging countries that were once recipients have built up capital and skills that are enabling them to invest in countries typically seen as the World Bank’s clientele. During the last decade, the state-owned Export-Import Bank of China alone made more loans to sub-Saharan Africa ($67.2 billion) than the World Bank ($54.7 billion), according to Fitch Ratings Inc. Combined with an estimated $43.6 billion of investment in the five years leading to 2010, according to the Heritage Foundation, that makes China a major player. Granted, these are only estimates. But they raise major questions. “We see China, Brazil and other emerging countries offering finance to developing countries to build infrastructure,” said professor Ngaire Woods of Oxford University. “There are lots of examples of China swooping in — in Kenya, in Ghana and in Angola.” Setting minimum standards The bank is keenly aware of this. Managing Director Caroline Anstey, who reports directly to outgoing President Robert Zoellick, said the World Bank is no longer “the only game in town.” “Things have changed dramatically since 1944,” she said. “Given the size of private flows, we are often a relatively small player. But we are an important catalyst for investment, and we do have considerable leverage.” Infrastructure is still a major part of the activities of the bank, which has invested more than $100 billion over the past five years through the International Bank for Reconstruction and Development and the International Finance Corp., which promotes sustainable private sector investment. Homi Kharas, deputy director at the Brookings Institution and a former World Bank economist who has contributed to a new book on the bank out this spring, said IBRD is no longer doing the job it was given in 1944. “It was set up as a conduit for channeling resources from rich countries to poor countries, but it is no longer fulfilling that role,” he said, adding that the bank effectively channels zero dollars net, as every year gross lending approximates repayments on outstanding loans. “The notion that success depends on and requires World Bank financing is being questioned,” he said. The 168.4 billion Brazilian reais ($96.8 billion) distributed in 2010 by the Brazilian Development Bank, or BNDES, was more than double IBRD’s $44.2 billion disbursement, Kharas noted. Whether you find this a worrisome trend depends on your perspective. While fans of multilateralism will bemoan the loss of the World Bank’s premier status, its critics welcome the fact that the bank faces competition on the ground. Jesse Griffiths, director of the Bretton Woods Project, said: “It is good for developing countries to have a choice, so that they don’t always have to go to the World Bank.” Others fear the World Bank’s declining share of global investment means it will have less influence in terms of setting minimum standards in areas such as corporate social responsibility, environmental impact and labor. The bank itself has adopted a series of reforms in response to allegations that some of its own projects have had a harmful environmental impact and led to corruption. Anstey pointed to the bank’s promotion of the Extractive Industries Transparency Initiative and its new lending instrument, Program for Results, which involves cooperation with recipient countries on environmental, procurement, fiduciary and other standards. Still, this does not reassure all skeptics. “There is definitely a concern that as the world moves out of the multilateral system, these types of competition are weakening standards,” Kharas said. “It becomes much harder to develop harmonized norms, and you obviously see the worries when people say the Chinese don’t have the same social and environmental safeguard standards.” IDA ‘glue’ for the poorest The bank’s other role of providing loans to poor countries through the International Development Association also faces competition. Woods, the Oxford professor, points to the way the African Development Bank moved quickly in 2009 to provide a $1.5 billion loan to Botswana, where IDA isn’t active. “The AfDB stepped in to the astonishment of everybody, including the World Bank,” she said. “That was a really classic example of the bank just being swept off the board.” However, IDA received a record recapitalization of $49 billion in 2010 and played a key role in helping poor countries hit by the financial crisis. Many seasoned observers want the bank to continue its role as a lender to poor countries. “I think IDA should stay there the way it is,” said Nancy Birdsall, president of the Center for Global Development. “It plays a good role and is a bit like the glue for the poorest countries.” IDA comes out “very well, frankly,” when measured on aid effectiveness compared with the U.S. Agency for International Development, Birdsall argued. Anstey, the World Bank managing director, echoed that sentiment, pointing to tangible results, such as 13 million lives saved over the past 10 years, 310 million children immunized, and new access to water and sanitation for 177 million people. That does not mean the bank can rest on its laurels. “The bank has tremendous potential to deal with the collective action problems everybody in the world is facing,” said Birdsall. Birdsall wants the bank to focus on what she calls global public goods — climate change, public health and natural resources, for instance, areas where the bank has built up a strong knowledge base. “These collective action problems require a combination of staffing, fiduciary capacity, analytical capability, understanding of markets and the global reach that the World Bank has,” she said. Alan Duncan, the U.K. development minister, said the bank already provides “much more” than finance. “Its knowledge and technical expertise are as important as the financial support it provides, all of which ensure the bank continues to be relevant,” he said. High-quality technical advice will always be needed. Indeed, in countries that are seeking to pursue their own domestically driven development agenda, advice may be more important than access to finance. One example is Nigeria, the oil-rich West African state that is seeking to make a difficult transition from a producer of raw materials to a supplier of value-added goods and services. As Mallum Sanusi, the Nigerian central bank governor, said on a recent visit to London, his own economy suffers from “structural deformities.” “This is a country that has a huge cotton belt and imports textiles from China,” he noted. “We are the world’s largest producer of cassava, but we import cassava starch.” Homegrown advice So rather than worrying about who will provide development finance, the key battleground for the bank will be over who is seen as the best resource for “softer” aid such as knowledge, analysis and advice. And indeed, bank officials — from Zoellick on down — clearly recognize that the bank does much more than just lending. “Increasingly, it’s our knowledge — over 60 years of development experience, data and analysis — that countries and policymakers want to tap,” Anstey said, adding that she expects to see “more emphasis” on open knowledge and less lending to middle-income countries. But as with investment, countries have other options for advice. A telling example came in February at an event in Sierra Leone, where the bank has 13 projects and $1 billion of investments. The troubled West African republic had invited Sushil Kumar Modi, deputy chief minister of Bihar, to explain how he turned the failed state into one of the fastest-growing regions of India. Bihar’s success was based on homegrown policies, and Sierra Leone sought advice on how to reduce infant mortality, reform land ownership and increase women’s representation in parliament. Modi’s decision to make the long journey to Freetown captured his hosts’ imagination, said professor Robin Burgess, director of the International Growth Center, which facilitated the meeting and which Kharas identified as a rival to the World Bank. “His speech gave real hope to a nation that is trying to pull itself up out of underdevelopment,” Burgess said. “The power of his example was unmistakable.” Indeed, developing countries can learn from each other. The bank, then, can “help connect and catalyze that learning and those interactions,” said Anstey. Governance reform But maybe the biggest opportunity for the bank is in climate adaptation, a classic public good since each country contributes toward the overall challenge and collective action is needed in turn. A growing number of experts are urging the bank to seize a role as the institution through which countries can pool resources needed to tackle climate change. Last year, for instance, the Council on Foreign Relations said the bank had a “unique capacity” to mobilize investment into low-carbon infrastructure. Anstey agreed the bank can play a “clear role” on climate change adaptation. After all, she said, while climate negotiators have called in vain for a U.N. green fund, the bank’s Climate Investment Funds have generated more than $40 billion in clean investment, most of it from the private sector. Birdsall suggested the bank set up a global public goods arm and “put it elsewhere, like in Beijing or Hong Kong or Sao Paulo or Delhi.” Her comment neatly raises the issue hanging over any debate about the future of the bank: the fact that the presidency — and the location of headquarters — rests in U.S. hands. There are growing calls for the bank to move toward a more decentralized model to give greater voice to bank members and make the location of its headquarters less toxic. Anstey talked of the bank being “location-neutral” and of acting as a “global connector and development collective.” The bank has already increased the share of low- and middle-income countries among senior staff and on its board, with a rise from 44 percent to 47 percent. In 2008, Justin Yifu Lin of China became the bank’s first chief economist from a developing country. Yet the United States still holds an effective veto on the board: Major decisions can only be passed with votes from countries that hold more than 85 percent of the bank’s shares, and the United States still has almost 16 percent. But hanging over all of this is the fact that every president of the bank since 1944 has been a U.S. citizen. Zoellick’s decision to step down after five years on June 30 has pushed the issue back into the spotlight amid growing calls for the next head to come from an emerging market. “I think it is definitely a problem for the World Bank that the president is chosen by the U.S., and that will have to change,” Birdsall said. Few expect that to happen. The United States will propose a candidate within a matter of weeks. Emerging markets are likely to put forward their own candidates but in a U.S. election year, Congress is likely to demand the job stays in American hands. Observers believe this could prove a deal breaker for wider strategic reform at the bank. “It is important because it will be a signal as to whether the world will try to reform global governance,” Kharas said. The United Kingdom supports reforms at the bank as key to ensuring it remains “relevant and a partner of choice” in 20 years’ time, Duncan said. Anstey declined to comment on the bank’s leadership but took a strong line on the need for a greater voice for emerging economies. “I do see some possible changes,” she said. “At the moment, Europe has eight out of 25 seats at the board. I think that could be consolidated into a single European seat.” Griffiths, the Bretton Woods Project director, said this tension is spilling over into the bank’s activities. While rich shareholders want the bank to push green technology, emerging economies believe it should finance coal-fired power stations in order to get electricity to poor households. “The bank wanted to approve an energy strategy, but it went to the board in April and there was a split,” he said. “My own take on this is, it is a governance thing causing an impasse.” Developing countries do not want climate support to come at the expense of development finance, Anstey argued. “They are also suspicious of a northern agenda that wants them to get right out of coal — even though coal may be their only resource,” she said. “Donors like Europe and the U.S. want restrictions on coal, but they also want investments in green growth. There is room here for the bank to help bring all sides together.” ‘Democratizing development’ But the vacancy would offer an opportunity for an innovative choice. “People like Bill Gates are playing a very important role in international development,” Kharas said. “One can at least conceptually conceive of candidates from NGOs or foundations that may take the bank in quite a different direction.” In the meantime, Anstey says the bank is focused on what she calls “democratizing development.” There is a vigorous intellectual debate underway about what long-term changes the bank should make to adapt to a changing world. In the short term, however, it may not be possible to make much progress until we know who will replace Zoellick at the helm of the bank. Read more: - World Bank President Robert Zoellick announces plans to step down - Does it matter who runs the World Bank? - The next World Bank president: A White House stuck between promises and political realities - Robert Zoellick on the ‘Democratization of Development’ Watch out for our complete interview with World Bank Managing Director Caroline Anstey, to be published Wednesday. Read more development aid news online, and subscribe to The Development Newswire to receive top international development headlines from the world’s leading donors, news sources and opinion leaders — emailed to you FREE every business day.