Saving the World Bank

Sebastian Mallaby

From Foreign Affairs, May/June 2005

Summary:  The next World Bank president will confront a nearly impossible challenge: saving the institution from a curious alliance of conservatives and radical activists that threatens to undercut its financial viability and effectiveness. Failure to head off the danger will mean the gradual decline of the best tool the world has for managing globalization, just when that tool is more needed than ever.

Sebastian Mallaby is a Washington Post columnist and the author of The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations.

MISSION IMPOSSIBLE?

In the past five years, the world has created the International Criminal Court; the Global Fund for AIDS, Tuberculosis, and Malaria; and the Kyoto carbon-trading system. Scarcely a month goes by without statesmen, high-level commissions, and civil-society activists calling for the creation of yet another institution: to manage postconflict reconstruction, to handle sovereign bankruptcies, to supplement or supplant existing bodies such as the United Nations. World leaders have focused less, however, on sustaining the good global institutions already in existence. A case in point is the World Bank, where an incoming president will soon confront a nearly impossible challenge: saving the bank from the same caste of statesmen, high-level commissions, and civil-society activists.

After 60 years of operation, the World Bank is large and lavish; it does not exude an aura of fragility. Its main complex in Washington, D.C., is an extravagance of glass and steel -- a contrast with the rundown UN headquarters in New York, where part of a ceiling collapsed two years ago. The bank's projects encompass an extraordinary range of goals, from road building to female literacy efforts to civil-service reform, and are spread across almost 100 countries. The institution gives out around $20 billion in loans and grants each year, a volume roughly 25 percent greater than total U.S. aid, three times the size of Germany's aid program, and seven times the combined output of all the UN agencies (although, to be fair, UN and government aid programs consist almost entirely of grants, rather than the bank's less generous grant-loan combination). When James Wolfensohn, the outgoing bank president, visits one of the borrowing countries, he is often treated like a head of state -- no surprise given the bank's financial clout in aid-dependent nations.

In terms of global governance, the bank's financial strength is a huge asset. Whenever a crisis demands an immediate big-money response, the United States and its allies, which dominate the bank's board, are quick to demand the bank's assistance. After the peso collapse of 1994, the World Bank pumped $1 billion into Mexico's financial system to help resuscitate the country. After Bosnia's Dayton accord in 1995, the World Bank led the charge for reconstruction. During the emerging-market crisis of 1997 and 1998, the bank supplied billions of dollars to the submerging Asian, Russian, and Brazilian economies. After the United States toppled the Taliban regime in Afghanistan, the bank proved its usefulness again, not least by supplying Afghanistan with an excellent new finance minister, Ashraf Ghani, an ex-World Bank economist. Most recently, in the wake of Asia's tsunami, the bank pledged a quarter of a billion dollars to affected regions before the Bush administration had even woken up to the magnitude of the crisis.

Beyond the brute fact of its financial strength, the bank's influence on development thinking gives it a key role in managing globalization. Its staff of 10,000 forms the greatest concentration of bright development experts anywhere. Its chief economists are often world-class figures: the 1990s featured Lawrence Summers, later the U.S. treasury secretary and president of Harvard, as well as the Nobel laureate Joseph Stiglitz. For better or (sometimes) worse, the bank's shifting intellectual fashions -- the integrated rural development of the 1970s, the macroeconomic adjustment of the 1980s, the current strategy of focusing assistance on a short list of countries with good policies -- have defined the outlook of the global development profession. The bank, in short, is at the forefront of one of the world's most critical challenges: how to turn a sliver of the rich world's wealth into progress against poverty.

But despite its continued status as a financial and intellectual powerhouse, the World Bank is endangered. Critics on both the left and the right are pressuring the bank to curtail the very activities that give it financial clout, while forcing on it restrictions that damage its effectiveness and professionalism. If they get their way, the bank will face a gradual decline into mediocrity. The challenge for its next president will thus be stiff: waking the world up to the risk of losing the World Bank at a time when it is more needed than ever.

THE TROUBLE WITH DEBT RELIEF

To understand the vulnerability of the World Bank, you have to consider its finances. The bank, after all, really is a bank: its core operation raises capital by selling bonds to investors in the rich world, then lends the money to developing countries at a slight profit. But in addition to such commercial lending, the bank has a subsidized window: rich countries donate money to its kitty every three years, and the money is lent out to developing nations. The terms of these "soft" loans are highly generous, but the bank does demand repayment and charge various small fees. The profits on commercial lending and these fees -- plus investment earnings generated by accumulated capital -- cover the World Bank's administrative costs.

This financial structure has served the bank well over the years, which is why the bank is far more professional than UN agencies. Because it does not depend entirely on the unreliable largesse of rich governments, it can afford a staff of hard-driving Ph.D.'s who would not be there if they were not paid handsomely. Recently, however, both parts of the bank's operation -- the commercial lending on the one hand, the soft loans on the other -- have faced attacks from both the left and the right, as well as pushback from some borrowers.