World Bank reform: The makings of a grand bargain?

Center for Global Development President Nancy Birdsall discussed a report on World Bank reform with its chief author, former Mexican President Ernesto Zedillo, Nov. 6 in Washington. Photo by: Jemila Abdulai

An expert panel appointed by World Bank leadership is pushing sweeping changes to the multilateral’s operations and governance. Bank President Robert Zoellick and others welcomed the proposals, but doubts remain about the organization’s appetite for reform.

“Looking ahead, like you, I see demand for our services remaining high well beyond the crisis, driven by the needs of the poor, by future crises, and by pressing global challenges,” Zoellick said in a letter responding to the report, requested amid the recent economic downturn. “I share your belief that this requires an institution that is agile, inclusive, effective, innovative, accountable, and financially sound.”

Zoellick noted that the World Bank Group has embarked on a series of reforms and is “discussing with our shareholders options for strengthening our resource base.”

The report, Repowering the World Bank for the 21st Century, was presented by commission chair Ernesto Zedillo the former Mexican president, during a panel event sponsored by the Center for Global Development on Nov. 6 in Washington.

While outlining the commission’s recommendations, Zedillo said: “All of us [commission members] are true believers of the institution; we all believe that the World Bank has been a significant institution and more importantly, that it should continue to be a significant institution in the future.”

A panel discussion followed his presentation, with CGD President Nancy Birdsall, Foreign Policy magazine Editor Moisés Naím and Arvind Subramanian, joint senior fellow at the CGD and the Peterson Institute for International Economics, sharing their thoughts.

“I think this is the best report about a World Bank reform that I’ve read in 20 years,” Naím remarked. “There’s nothing as good and comprehensive, cogent and intelligent as this.”

Voice and participation

The World Bank has been increasing the voice and representation of member countries in the developing world, but U.S. veto power and a dominance of European Union representatives on its executive board have raised concerns about voting and decision-making arrangements.

“A significant gap remains between the voting shares of developing and developed countries as groups,” said Zedillo, who is director of the Yale Center for the Study of Globalization.

To improve the effectiveness of the executive board, the commission suggests a reduction in the board’s size from 24 to 20. The reduction would be made by cutting four board positions currently held by Europeans.

Additionally, the commission recommends that countries that have designated chairs, including the United States, Japan and Saudi Arabia, give them up to ensure that the board is “composed entirely of elected chairs representing multi-country constituencies.”

U.S. dominance within the World Bank would be decreased by eliminating the country’s veto for amending articles and instituting a threshold voting structure of 80 percent.

The commission is calling for automatic shareholding reviews and for abandoning the linkage between International Monetary Fund quotas and International Bank for Reconstruction and Development shareholding.

“The bank should develop its own rules for that,” Zedillo said.

Governance and accountability

The report cites strategy formulation as one of the key challenges facing the World Bank. While the bank produces a constant stream of strategic documents, it lacks the means to effectively use them to set priorities, balance trade-offs and align operations and resources, according to the commission.

One of the main reasons for this limitation is the group’s current governance structure, the panel suggests.

“The executive board’s role in strategy formulation is limited by several factors. Neither the board nor individual directors are held formally responsible for the World Bank Group’s overall strategic direction,” Zedillo said. “Given its many responsibilities, the executive board has insufficient time to devote to strategic matters.”

The report calls for the transfer of “decisions of a strategic significance,” like the determination and approval of financing options, to management.

The World Bank president should not have to be a U.S. citizen, the commission says. Instead, the World Bank board should include country ministers that select, review and, if required, dismiss the president. They should also set the group’s strategy.

“The president, in principle, would be stronger if he doesn’t have to deal with the resident board,” Zedillo suggested. “We propose that the board should introduce a framework for the annual performance review of the president with very clear criteria and also propose very complete steps to strengthen the group’s safety net unit.”

The board should meet a few times a year, not twice weekly, according to the commission, which argues that its reform suggestions would free up resources, increase accountability and reduce conflicts of interest.

Praise and concerns

Zoellick praised the commission’s suggestions on the participation of developing countries in the governance of the World Bank Group.

“This issue is at [the] heart of our legitimacy, and has been the main focus of discussions among shareholders and Executive Directors over the last few years,” Zoellick wrote in his letter to Zedillo. “The international system needs a World Bank that represents the economic realities of the 21st Century, recognizes the role and responsibility of dynamic developing countries, and provides a larger voice for Africa.”

He also noted that the bank’s shareholders had agreed on the importance of securing an increase in IBRD voting power for developing countries of at least 3 additional percentage points in addition to 1.46 percent already agreed upon. This would bring developing countries to at least 47 percent, he said.

“We should try to see if we can increase the share of the developing countries toward 50 percent over time, as we engage in emerging economies to share the responsibilities of assisting poorer countries with their development,” he said. “We must also continue pushing ahead with voice reform and changes in voting power for IDA and IFC.”

Zoellick sounded less enthusiastic about the commission’s recommendation to elevate the board of directors, noting that “there are opportunities to achieve improvements in the efficiency of the existing governance arrangements.” He added that the current composition of the board, with the addition of a third African chair, “provides a balanced representation of constituencies” and is “well suited for supporting” the bank’s development mandate.

While there is a general consensus about what needs to be done to make the World Bank more effective, power dynamics may hinder the implementation of some of the commission’s recommendations, Naím suggested at the report’s launch event in Washington this week.

“At the end of the day, it’s a story about hypocrisy and a story about power,” he said. “If you look at the report, there’s an amazing consensus about what needs to be done. When there is such a consensus and such paralysis, then there is something else going on.”

He suggested that more attention should be paid to how to implement the commission’s recommendations, and to identifying political coalitions that would steer affairs.

“That is an exercise in power, not an exercise in technocratic decisions,” he said.

Subramanian called the report “good” and “sensible,” but cautioned that there was a resistance to change among high-level bank officials.

“I think the real problem is that, actually, there is very little interest in change among the important stakeholders,” he said. “It’s a cozy arrangement for those who have power. On the other side, those who are getting power, it seems to me; really don’t care much about changing the current status quo.”

Without the involvement of emerging powers like China and India, he argued, the possibility of reform would be quite restricted.

Birdsall complimented the commission on a “bold,” yet “polite” and “subtle” report. The timing for change could not be better, she said.

“I do think it’s a moment unlike the last 30 or 40 years, where there’s a possibility of change,” she stressed.

The CDG president noted that while there has been some discussion about the citizenship requirement for the World Bank presidency, there is still some resistance.

“This has been announced at the G-20, and it’s in this report,” Birdsall said. “The only thing that’s missing in President Zoellick’s letter and in the G-20 communiqué is the words ‘without regard to nationality.’”

Political leadership will be essential when it comes to implementing the recommendations, she continued, highlighting the concept of a double majority vote, which would grant poorer nations the opportunity of a veto.

It remains to be seen whether the commission will prompt World Bank action. But with the ball set in motion, its report just may, as one panelist called it, “the grand bargain” of the decade.

Rolf Rosenkranz contributed reporting.

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