World Bank Reform: Proposals for the Next G-20 Summit

EDITOR’S NOTE: The April 2 G-20 summit in London must focus on putting in place coordinated actions on how to immediately halt the global recession and its impacts particularly on the world’s poorest nations, says Johannes Linn, executive director of the Wolfensohn Center for Development at Brookings. A few excerpts:

At this time of global crisis, the main priority is to act fast in reversing the tide of world-wide recession and its impact on those who can least protect themselves, including and especially the poorest in the developing world. The focus of the G-20 Summit on April 2, 2009 therefore should principally be on how to coordinate and commit to actions that will help achieve this goal. As the communiqué of the just completed meeting of the G-7 finance ministers in Rome confirmed, the multilateral development banks, and especially the World Bank, have a critical role to play in supporting an effective response to the crisis in the developing world. It is therefore essential that the G-20 summit in April strengthens the capacity of the World Bank to play this role.

Background

In contrast to IMF reform, the reform of the World Bank has not been an issue of debate nor been given much attention over the last few years. The current crisis requires some immediate actions to assure that the World Bank plays an effective role in supporting other global actions, but it also offers an opportunity-and risks- in moving toward more fundamental reform.

This note presents a few key recommendations for World Bank reform as an input into the preparation of the G-20 summit agenda. The first two recommendations relate to actions that should and could be taken immediately; the next four recommendations require longer lead time of preparation, but the decision to set in motion the preparatory process should also be taken at the summit. A final recommendation relates to the broader management of the G-20 summit process in which the World Bank could also play a supportive role.

Immediate actions

Recommendation 1: Immediate reform of leadership selection in the World Bank (as in the IMF) is critical.

An open, competitive and merit-based process for the President of the World Bank can and should be immediately agreed upon-with a commitment by all to honor this agreement also in its implementation. This should be done in parallel with a similar decision for the IMF. This change is a signal of greater inclusiveness and legitimacy and hence an obvious counterpart to the creation of the G-20 summit.

Recommendation 2: The World Bank should play a principal role in providing quick-response funding for developing countries, and especially to the poorer countries, during the current crisis.

The Bank is well placed to offer crisis-response financial support to help maintain public investment and social programs, because of its long-standing practice of providing budget support, its track record with funding social safety nets, its traditional role in infrastructure finance, its capacity to support bank recapitalization and trade finance and its growing role in global public goods provision.

The Bank should declare a “development emergency” and permit temporary changes in its operational rules to assure quick commitment and disbursement of funds6, including: relaxing rules on counterpart funding; relaxing the rule restricting lending for budget support (especially for countries with good performance ratings); and opening up the possibility of using IBRD lending to poor countries (subject to the application of a strict debt sustainability framework) with an commitment from the World Bank’s International Development Association (IDA) and/or bilateral donors of buying down the high interest rates when grace periods expire.

In addition, under the “development emergency” the Bank’s fiduciary and safeguards procedures should be put under emergency rules, as has been done in post-conflict situations, where fast-track project preparation and disbursement procedures have been successfully implemented without loss of ex-post quality of project implementation (as for example, in the case of the Bosnia-Herzegovina reconstruction program). Ex post monitoring should be applied to ensure that incentives for effective preparation remain in place.

In order to avoid that the front-loading of commitments and disbursements will undermine IDA’s capacity to assist poor countries, donors should agree to an early review of IDA’s resources and a fast-track supplemental IDA replenishment if needed.

For the International Bank for Reconstruction and Development (IBRD), the existing capital base allows an estimated additional lending of about $100 billion. However, special care will need to be taken to ensure that the rapid ramping up of lending does not undermine the financial viability of the Bank. A capital increase may eventually be necessary if the calls on IBRD-support exceed the Bank’s prudent lending capacity.

Longer term actions

Recommendation 3: The World Bank should in the future play a principal role in aid delivery, in aid coordination at the country level, in financial support for the provision of key global public goods and in providing the knowledge base for development.

The Bank has played such a role in the past and remains uniquely suited to play this role in a number of ways: it has a strong track record of quality delivery of aid programs and demonstrated capacity for aid coordination at the country level; it can effectively link global public goods provision to sensible country strategies in developing countries; it has the capacity to develop and support global public goods strategies at a global level; and it has a strong capacity for development research and policy analysis.

Recommendation 4: The decline in the financing role of IDA and IBRD needs to be reversed through appropriate changes in mandate, operational policies and funding of the World Bank.

For the Bank to exercise the principal role, as envisaged in the third recommendation, some important changes in the mandate, operational policies and funding of the Bank are required:

Mandate: The World Bank needs to stay engaged in middle income countries-along the lines of the European Investment Bank (EIB) in Europe; it needs to be given a greater and clearer role for promoting global goods on a global basis, including in advanced economies; and it should be given a clear mandate to take a lead role in helping to ensure effective aid coordination under the Paris Declaration.

Operational policies: The Bank should be allowed to adopt stream-lined operational modalities in middle income countries similar to the EIB, and should be given much more leeway in developing its risk mitigation instruments. The Bank should take on a lead role in ensuring that the simplification and harmonization of procurement, fiduciary, safe guards and reporting policies of all multilateral organizations-and of the official bilateral programs-be subjected to a time-bound program of implementation.

Funding: The World Bank should be the principal agency through which incremental aid resources and global public goods funding are channeled. Creation of new funding windows and preferential treatment of windows other than the World Bank should be discontinued. They only add to the problem of fragmentation and to the reduction in the effectiveness of all aid and public goods funding flows. Any new funding for the Bank should be channeled into its principal financial windows (IBRD, IDA and IFC) not into new trust funds. The only exception to this rule could be a general purpose global public goods fund, similar to IDA.

Recommendation 5: As in the case of the IMF, an expanded mandate, reformed operational policies and increased funding for the World Bank have to be accompanied by changes in the governance of the Bank to ensure greater legitimacy and greater operational effectiveness.

The Bank’s governance structure traditionally has been dominated by parallelism with the IMF. This needs to be abandoned, given the significant differences in mandates, operational modalities and funding of the two institutions.

The voice and vote of emerging market economies need to be strengthened in the IBRD. Voice and vote of the recipient countries need to be strengthened in IDA, along with maintaining an incentive for smaller donor countries to continue their above average support. This can be achieved by introducing a double majority rule.

Recommendation 6: World Bank reform requires careful preparation, not rushed and partial decisions, and needs to be considered as part of a broader reform of global aid and public goods architecture.

There is a risk that a rushed decision process will lead to band-aid solutions in the Bank’s mandate, operational policies and funding mechanisms. A high-level, comprehensive, but time-bound reform process should be initiated under the aegis of the G-20 Summit which takes a serious look at how the key global institutions can be strengthened in the overall context of global governance, aid architecture and public goods reform.

Postscript

Recommendation 7: The G-20 Summit process needs a technical secretariat. The World Bank should, along with the IMF, UN and WTO, provide staff and technical support for such a newly to be constituted secretariat.

The G-20 Summit needs administrative and technical support, if it is to become an effective global forum for dialogue and decision-making among the world’s leaders. A secretariat is required for this purpose. It would support the traditional troika and Sherpa processes. A joint secretariat consisting of the IMF, UN, WTO and the World Bank (and possibly the OECD) should be set up to help prepare the G-20 summits and to monitor implementation of agreements.

Re-published with permission by the Wolfensohn Center for Development at Brookings. Visit the original article.

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