An exchange with Paul Isenman on the World Bank’s future

I recently gave an interview, provocatively titled “Is the World Bank Still Relevant?”  My good friend and former colleague, Paul Isenman, had such a thoughtful critique of what I said about the Bank’s future that I thought I would post it on our blog.

From Paul Isenman:

It is hard to disagree with what Shanta Devarajan says about the future of the World Bank, in part because he is usually right and in part because his views here seem quite reasonable. Shanta’s views are fairly broadly shared, for example by a working group of the Center for Global Development (CGD) and a subsequent analysis by CGD’s Todd Moss and Ben Leo, which focus on similar changes in the World Bank International Development Association’s  (IDA) mission as major recipients pass the IDA income threshold and transition to “graduation” (i.e. exclusion). I hope, though, that Shanta would agree that the views he has presented are a sensible Plan B for the World Bank’s future mission in the event that its shareholder countries continue to impose tight constraints on the Bank’s financing, eligibility criteria, non-financial safeguards, and conditions.

There is, though, a potential Plan A. It would include the emphasis Shanta and CGD put on global and regional public goods, including knowledge management and financing of regional programs. But it would be more ambitious in applying that emphasis on knowledge and on complementary financing at the country level as well. Four things stand out about Plan A:

  1. It would recognize both that it is important to see poverty in relative as well as absolute terms, and that absolute standards of poverty are heavily influenced by relative standards at the time they are adopted. This is why poverty standards on both donor and developing countries evolve over time. So when a given global poverty target—such as $1.25 per person per day, set over 25 years ago—can largely be achieved, it is more than time to raise the target rather than declaring victory and retiring from the field.  
  2. Consistent with that evolution of poverty standards, Plan A would include revised per capita income thresholds for IDA and International Bank for Reconstruction and Development (IBRD) eligibility significantly upward, greatly increasing the demand for both IDA and IBRD financing. This means recognizing the lack of an analytic or moral basis of continuing to use IDA and IBRD income thresholds of per capita income that were set in absolute (real) terms—more than 40 years ago in the case of IDA, and more than 30 years ago in the case of IBRD. In fact, the effective (operational) threshold for IDA graduation was reduced by 38 percent in the early 1980s to meet a short-term funding shortfall and never restored. Its threshold of $1,215 (fiscal year 2015) is now less than one-thirtieth of that of the average per capita income of OECD countries. And there is empirical evidence confirming that IDA “graduation” is taken as a signal by other donors to cut back their own concessional support as well. Of course donors will give much more aid to the disadvantaged within their own borders and will gradually raise the income threshold for that aid as their income rises. But how defensible is it for the collective level they set for IDA eligibility to fall to one-thirtieth of their average per capita incomes, let alone to have that level fall by almost 40 percent over 40 years?
  3. Plan A must recognize the importance, as Shanta said, of providing IDA concessional financing for fragile states, along with complementary support on technical and institutional issues. But recognize also that there are high, usually higher, returns to concessional financing for poverty reduction in other countries. This applies particularly to other countries with major problems of absolute (let alone relative) poverty and human development and with better governance and capacity. If the IDA income threshold for eligibility were raised, the dialogue would shift from how to find ways to spend IDA funds in the future to how to raise significantly more IDA funding to use at both country and global levels.  
  4. The processes that slow the Bank’s response time and impose conditions need to be streamlined and reformed, particularly the “safeguards” that discourage demand for IBRD borrowing. It is vital to address social and environmental, as well as procurement, issues. But as the Bank’s “Progress for Results” lending recognizes, it is more important to help countries address such issues overall than to have highly complex and time-consuming processes at the project level that go far beyond what is required in most donor countries. If borrower countries see the World Bank more as the kind of provider of integrated knowledge and financing that Shanta rightly emphasizes and less as setting unnecessarily onerous and time-consuming conditions, demand for IBRD lending would increase substantially. And that demand is likely to increase further as global credit markets, particularly for long-term lending, gradually tighten up. 

In sum, Plan A would generate significantly higher demand for both IDA and IBRD financing and associated World Bank expertise to assist countries to achieve global Sustainable Development Goals and their national development objectives. The reason for Plan A is not to justify increased lending from the World Bank per se but to enable it to play the role rightly called for by Shanta in increasing inclusive growth and poverty reduction in developing countries. The big increase in both IBRD and IDA financing that occurred in response to the global financial crisis is an indicator on the supply side of the World Bank’s organizational capacity to increase its financing. And the Bank’s decreasing market share of external financing to both IBRD and IDA countries strongly suggests that it could sharply ramp up its financing while maintaining its quality standards.

Plan A does not seem likely today, given the combination of fiscal stringency and reduced commitment to official development assistance in donor countries. And aid is of diminishing importance in global financing for developing countries. But aid remains important and can help accelerate inclusive development. Let’s not let current fiscal stringency become the excuse for defining IDA and other aid objectives sharply downward, let alone into a downward spiral, for the longer term.