Two years into President Jim Yong Kim’s controversial reform process, is the World Bank better or worse at fighting poverty?
Bank management is still feeling the effects of internal turmoil and staff dissatisfaction after a $400 million cut in operational expenses and a controversial reorganization. But while these pieces of the reforms have claimed headlines, they are not the only story that can be told about the new shape of the world’s largest international financial institution.
Procurement reform, the expansion of a results-driven lending program known as Program-for-Results, an overhaul of the institution’s social and environmental safeguards, the largest replenishment of the bank’s fund for the poorest countries and a financial reform of the bank’s lending arm for middle income countries are also part of the institution’s recent history. And despite the internal noise, the World Bank this year has committed to lending more money than it has in the last four years.
2015 marks the second year in a row of increased lending, with commitments increasing by almost $11 billion since 2013. Kim has hinted the time may be ripe to ask for a capital increase in the near future. "We’ll have limits in terms of how low we can go in our equity-to-loan ratio. So, we’re not there yet, but depending on what happens over the next few years we may get there," he said at a press conference in Lima.
What do lending commitments mean in the broader context of the bank’s twin goals of ending extreme poverty by 2030 and boosting shared prosperity by improving living standards for the poorest 40 percent of the population in every country? Is it time to say Kim’s reforms are paying off?
Behind the numbers
The latest increase in World Bank lending commitments — from $31.55 billion in 2013 to $42.49 billion in 2015 — can be attributed largely to two developments over the last two years.
First, the bank’s fund for the poorest countries — known as the the International Development Association — saw the largest three-year replenishment in its history in December 2013: $52.1 billion to finance projects with grants and concessional loans until June 30, 2017. Over the last three fiscal years, IDA lending commitments averaged about $19 billion.
Second, 2014 financial reforms within the International Bank for Reconstruction and Development — the bank’s lending arm for middle income countries — boosted that institution’s lending capacity from $15 billion annually to $25 billion annually for larger borrowers.
In April 2014, Kim announced an increase in the IBRD’s single borrower limit by $2.5 billion for the emerging economies of Brazil, China, Indonesia, India and Mexico, and a revision of IBRD’s minimum equity-to-loan ratio — key reforms that allowed IBRD to increase lending capacity.
High demand for World Bank lending among middle income countries is a positive signal for an institution seeking to maintain its influence over development finance decisions at a time when new multilateral institutions are emerging as competitors, according to Jeffrey Gutman, senior fellow in the global economy and development program at the Brookings Institution and former vice president of operations policy and country services at the World Bank.
“At one time it was thought that [middle-income countries] would go elsewhere rather than deal with the bank,” Gutman told Devex.
Larger borrowers such as Brazil, China, Indonesia, India and Mexico have options when they seek out loans, explained Scott Morris, senior fellow at the Center for Global Development.
And the fact that these countries are welcoming more lending from the bank is a measure of the institution’s continued importance.
Morris said that if lending is projecting upward, it indicates that larger borrowers “have greater demand for the bank’s products” and appreciate “the package of support the bank is providing.”
Is more lending enough?
Senior management hopes their reforms will lead to a leaner institution with the ability to lend more. But they are also trying to build a World Bank that is better positioned to share knowledge and provide better services to poor nations in pursuit of the bank’s twin goals.
While an increase in lending commitments — largely directed to middle income countries — positions the World Bank as a leader in an increasingly cluttered multilateral landscape, it may be too early to say whether it will move the institution closer to ending extreme poverty and boosting shared prosperity.
As one anonymous bank staffer pointed out in an email to Devex, investment projects usually take about five years to implement, so bank observers will have to wait until 2020 to learn what the lending surge has accomplished, “beyond increasing developing country debts.”
It’s also important to keep in mind that the increase in lending is demonstrated in commitments, which are not yet disbursed. The length of time required before lending commitments become disbursements varies widely, according to Morris, who added that in some cases commitments are never disbursed at all.
More lending commitments don’t automatically mean better development projects either, according to past reports conducted by the World Bank’s Independent Evaluation Group. The bank’s lending commitments increased between fiscal year 2006 and fiscal year 2013, but at the same time the World Bank’s Independent Evaluation Group reported a decline in “moderately satisfactory or better development outcome ratings” for bank projects over that same time frame.
The report called it a “long-term, steady downward trend in overall performance.”
The bank’s ability to lend is a necessary component of achieving its goals, but it is not the only factor. Turning lending into results for the poor also depends on smooth procurement systems, fair and effective safeguards, motivated and qualified staff, knowledge sharing and leadership — all factors Kim and senior management are still working to improve.
NOTE: This article was updated at 10:31am. A previous version incorrectly stated that Kim has already asked bank shareholders for a capital increase.
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