There have been tectonic shifts in the global economy since the founding of the World Bank in 1944 at Bretton Woods, yet the institution continues on the same open-handed and antiquated course.
For the first 30 years of its tenure, the Bank was the dominant source of international resources for emerging economies. Capital controls prevailed; financial markets were immature; foreign investment interest in developing countries was minimal. Now, the net $18 billion the Bank has provided to developing countries over the past seven years is dwarfed by the $1,450 billion contributed by the private sector.
It is widely promulgated that the World Bank devotes the greater part of its effort to countries denied access to market financing and to social projects that cannot command the interest of private lenders. In truth, the Bank centres its portfolio on the most credit-worthy candidates and demands a host government guarantee that renders capital markets indifferent to the ultimate use.
Today, the World Bank Group, which consists of five agencies, is principally engaged in the lending of money to emerging economies which it gathers in the financial markets by means of AAA ratings supported by industrialized member capital subscriptions. Since 1969, total Group annual lending has risen from $1.8 billion to $32.5 billion. The areas of intervention have shifted from project-specific loans to adjustment lending where funds are utilized for general government financing or large sectoral reorganizations - rising from approximately 20% to 63% of IBRD operations in the 1993-99 period. The present broad overlap with the private sector is specifically forbidden in the Bank's Articles of Agreement. Increasingly, crisis lending, clearly outside of the Bank's mandate, has diverted attention and resources from its avowed mission. All of these serve to question the Bank's comparative advantage and its current focus.
The central lending role that dominates the World Bank should become peripheral and largely phased out within the next five years, notably in those economies that enjoy capital market access and now monopolize over 99% of its lending capacity. Instead, the Bank must transform itself into the designer of an intellectual infrastructure for the emerging world that empowers entry into a global system where money, skills and technology search continuously for profitable opportunities without regard for national boundaries.
A matrix for Bank policy
If the Bank's function is examined in the light of five simple premises upon which there is general agreement, a matrix emerges that identifies only a narrow universe of recipients to which it should lend and a new role for the Bank itself. First, the Bank's mission is to alleviate poverty; second, the Bank should not displace the private sector; third, developing countries have high rates of return on capital if correctly priced and framed; fourth, a set of economic and public policies, which promote growth and foreign investment, have been identified; fifth, money, skills and technology flow easily through today's global economy.
Two questions must be asked for any World Bank operation contemplated. Why doesn't the private sector perform this function? Why doesn't the local public sector perform this function?
The developing world can be divided into two sets of countries and two types of activities, as set out in the table in column one.
This analytical framework implies that the Bank should focus on activities which the private sector will not enter in countries without capital market access but with positive institutional environments.
There is no role for any public sector entity (including the World Bank) in region A (profitable private sector activities in countries with capital market access). Region B (public interest activities in countries with capital market access) is the domain of local governments. Regions C and D are the targets for World Bank efforts. In region C (profitable private sector activities in countries without capital market access) the Bank must identify the obstacles that prevent the private sector from fulfilling its role and remove the impediments. These may take the form of a risk (including political risk) that private participants cannot assume efficiently, an institutional bottleneck, a lack of information or an absence of clearly defined public policies. Finally, region D (public interest activities in countries without capital market access) requires subsidization rather than financing and the elimination of barriers to private sector provision of services.
What can be done in poor countries with institutional and policy environments that preclude the effective utilization of additional resources? The Bank's own research shows that flows under these conditions are not beneficial and may even be counter-productive. That which is causing the private sector to abstain will lead to failure in Bank-sponsored projects. The Group's role in these nations must be limited to advice on the transformation of the economic environment which will attract foreign investment and Bank resources.
The real world of World Bank lending
Displacement of private sector resources is specifically enjoined in the World Bank's mandate. Yet, a review of the Group's 4,100 operations approved over the last seven years reveals that only 22% of resources (excluding aid transfers) went to countries without an international bond rating of B or higher. Approximately 30% of resources flowed to nations with an investment-grade rating and an additional 50% to countries with high-yield ratings at the time of the loan. More disquieting, the share of non-rated recipients in IBRD lending has fallen from 40% in 1993 to less than 1% in 1999.
Only IDA, the aid arm of the World Bank Group accounting for less than one quarter of total flows, demonstrates a focus on countries without capital market access. Non-rated nations received 68% of resources with no trend over the 1993-99 period.
The Bank claims that the private sector, which concentrates 80% of flows in a dozen countries, cannot substitute for the Group's lending role which provides resources to the entire developing world. However, a review of the major recipients of the Group's non-aid resources over the last seven years reveals that 11 countries accounted for 70% of total flows while the remaining 145 developing IBRD members obtained 30%. In fact, the share of the leaders increased from 63% to 74% from 1993 to 1999.