The World Bank opened in 1946 to finance a global economy just emerging from colonisation and warfare and just embarking on the Cold War. Today the global development landscape is radically different, and capital circles the globe at volumes unthinkable back then. Why keep the World Bank now?
Thatâ€™s the question asked in a forthcoming issue of the Journal of Economic Perspectives. One of the papers appearing there is by Martin Ravallion of Georgetown University; another is by me and Michael Kremer of Harvard. Ravallion and Kremer are also CGD fellows.
The papers have a common thrust, which I did not expect. (I didnâ€™t read Ravallionâ€™s until we had finished ours.) Ravallion spent 25 years as a research leader within the Bank, while Kremer and I are outsiders. That could lead us to very different conclusions.
But we agree solidly on the big things: Yes, the World Bank is still needed and has ample justification in economic theory. No, its principal role is no longer simply to loan money to countries â€œunable to otherwise obtain the loanâ€, though that outdated wording is still baked into the World Bankâ€™s Articles of Agreement. Today, many of the Bankâ€™s client-countries have other sources of capital.
The World Bank has evolved instead to fill a new role. And the three of us agree: that role is reducing global poverty. Ravallion writes,
Eliminating global poverty calls for a global institution â€” it is unlikely to happen if we rely solely on private investors, bilateral aid or non-governmental organisations. Fulfilling that role calls for a more ambitious vision of the Bankâ€™s role as a development knowledge leader. Its central focus should be on both the constraints on development at country level and the cross-country coordination needed for supplying key global public goods.
Kremer and I agree: Modern analyses should proceed from the premise that the Bankâ€™s central goal is and should be to reduce extreme poverty. We show that the vast majority of donor subsidies to the Bank go to its funding vehicles aimed at the poorest nations. We argue that the Bankâ€™s principal impact arises through its influence on national policies, and that economic theory suggests such influence is often best exerted multilaterally. This view implies new ways to structure and evaluate the institution.
Why a focus on poverty for an entity whose Articles of Agreement donâ€™t mention that word? One way to answer that is to trace what happens to the subsidy the World Bank gets from its shareholders. I donâ€™t mean what the Bank spends its money on, which is financed in part by its own internal profits.
I mean the ongoing economic cost that shareholders bear due to the existence of the Bank, including the opportunity cost of capital tied up in the Bank. The vast majority of that subsidy today goes to support activities in the poorest countries of the world â€” not in countries that have ample access to private capital. Kremer and I estimate that the Bank costs its shareholders around US$11â€“14 billion per year.
This is an extraordinary bargain given what shareholders get from the Bank: We agree with Ravallion that an important part of what they get is global policy influence and knowledge for poverty reduction.
Some might see this focus on poverty as conflicting with the Bankâ€™s role articulated by Nancy Birdsall here at CGD: â€œthe provision of development-relevant global public goods.â€
We see little conflict. Birdsall does not mean all global public goods, which include everything from arctic biodiversity to asteroid-strike protection. Rather, she means global public goods that ultimately affect the poor, such as â€œsupporting research in agriculture, health, and clean energy; and collecting and analysing economic and social data.â€
Kremer and I agree with all of those in our paper, as Ravallion does in his. And Birdsall clarifies that her vision, â€œfar from excluding the current goal of ending poverty â€¦ would embrace poverty reduction as an outcome of building stable, prosperous societies.â€
Kremer and I do go somewhat further by not only considering certain public goods to have the ultimate effect of poverty reduction, but also considering poverty reduction itself to have characteristics of a public good.
Thoughtful observers of the Bank caution against this interpretation because it seems to allow nearly any â€œsocial-sectorâ€ project to be labelled as providing a global public good or GPG. Devesh Kapur of the University of Pennsylvania and CGD has warned that, in seeking to reinvent the Bankâ€™s public image, its management and staff may tend to label all kinds of activities or â€œnetworksâ€ as GPGs, meriting involvement on the basis of the moral claims that public goods invoke, and their ready slogan-appeal for Northern taxpayers.
While many initiatives certainly do meet the criteria of public goods, the management also includes what one might call â€œPotemkin GPGsâ€.
We take this pragmatic point. But we do not mean that any project with the word poverty in its title provides GPGs. We mean that activities that demonstrably reduce global poverty do provide a public good simply for that reason.
The Bank has numerous shortcomings, and both papers are frank about those. Ravallion notes continuing skewed incentives for lending volume and laments that at the Bank â€œtoo much of what is labelled â€˜knowledgeâ€™ is little more than sectoral lobbyingâ€. Kremer and I are sceptical of some of the Bankâ€™s policy influence. And we note the need to shore up the Bankâ€™s political legitimacy â€” further adjusting its shareholding structure to reflect the 21st-century economy, as well as opening up the possibility for non-US citizens to hold its presidency.
The world still needs the World Bank, and these papers chart part of the course for this Bank to become the Bank the world needs.
The author is a senior fellow at the Centre for Global Development where he leads the Migration and Development initiative.
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