The fate of the World Bank during a divided US government

World Bank Group President Jim Yong Kim makes remarks at the Plenary Session of the IMF and World Bank's 2017 Annual Fall Meetings, in Washington, U.S., October 13, 2017.   REUTERS/Mike Theiler - RC1820C71280

In its first two years, the Trump administration has not paid much attention to the World Bank. Recent research suggests that this will change now that Republicans have lost control in the House of Representatives in this week’s midterm elections.

How US politics influence the World Bank

To obtain new bilateral aid or to change the use of already approved funds, the U.S. administration must receive approval from committees in both the House and the Senate. Losing control of either chamber can limit the administration’s ability to use bilateral aid for foreign policy purposes. In that case, using the World Bank as a foreign policy tool becomes more attractive. Historically, that is when we see the most evidence of U.S. influence in the World Bank. (I will discuss these issues also as part of a panel at a multidisciplinary conference on the New Building Blocks of Development, at Duke University, November 15-16.)

In a forthcoming article in the “Review of International Organizations,” my colleague Erasmus Kersting and I explore the role of U.S. domestic politics in shaping U.S. influence over the World Bank. Our argument mirrors the one laid out above. In the short run, there are many ways the U.S. administration can influence the World Bank—through formal actions of its Executive Director, through informal networks (often with Treasury serving as the lead agency), and through World Bank middle management. It is more likely to exercise this influence—and in the process undermine the Bank’s independence—when a divided U.S. government restricts the administration’s ability to use bilateral aid as a foreign policy tool.

The case of Trump

Obviously, the Trump administration has not always followed the typical patterns. Trump has very publicly used cuts in bilateral aid to punish countries (“the stick”—see Trump’s recent threats to cut aid to Guatemala, Honduras, and El Salvador); the use of aid increases as a reward (“the carrot”) is less evident. In some cases, Congress has pushed back against Trump’s rescission plans. With the Democrats in control of one chamber, we can expect more pushback—even in the case of cuts to aid.

Thus far, the Trump administration has been anti-multilateral. It has not favored things through established international organizations, e.g., preferring bilateral trade measures to operating through the World Trade Organization. How that might change is an open question. The Reagan administration was also staunchly anti-multilateral until its second term, when the administration realized the multilateral development banks could provide a solution to the Latin American debt crisis then dogging U.S. commercial banks. That culminated in the Brady Plan, which started a few weeks into the George H. W. Bush administration. So we might see a turnaround in the Trump administration’s attitude if the World Bank suddenly becomes useful because Congress is uncooperative or due to a global crisis that threatens U.S. interests.

Actually, what seems more likely at this point is an increase in negative U.S. pressure. That is, if Congress does not allow the administration to cut bilateral aid to punish countries, the administration might push the World Bank to cut its lending to those countries. The U.S. has exerted some influence like this in the IMF already (until recently—with the release of pastor Andrew Brunson—letting it be known that the U.S. would not support an IMF bailout for Turkey). Because the business of the World Bank is lending, the institution would resist pressure to cut lending more than it would resist pressure to increase lending. But the Trump administration’s hostility to multilateral agencies actually makes its threats toward them credible, and might give it leverage to effect such changes.

Long run implications for the World Bank

World Bank lending doubled in response to the global financial crisis. A sharp drop in World Bank lending now could put it in the perilous position of being a development agency with a negative net resource flow—receiving more in loan repayments from poor countries than it sends out in new loans.

The broader question—given the sometimes hard-to-reverse actions of the current U.S. administration—is what would happen to the world order without U.S. leadership. Despite the generally negative press, the U.S. has often been a force for good. In the World Bank, for example, it pushed for project evaluation in the 1970s, was instrumental in the founding of the Inspection Panel in the 1990s, and has been advocating for more information disclosure in the 2000s. It is hard to envision another country taking over the leadership mantle since the World Bank’s Articles of Agreement give the U.S. an effective veto over structural change.

Instead, the institution is likely to drift. Current trends, like the proliferation of special purpose trust funds administered by the World Bank, will continue. But they are a poor substitute for leadership. Lack of leadership will make it hard to maintain core funding through replenishments of IDA, the World Bank’s soft loan window for very poor countries, and via capital increases for the IBRD, the World Bank’s hard lending window for middle-income countries.

The Trump administration’s antipathy toward multilateralism and, in particular, toward the international commitments of prior U.S. administrations will accelerate the trend among credit rating agencies to discount World Bank callable capital and instead focus on paid-in capital when rating bonds issued by the World Bank. These bond ratings are essential for the Bank’s business model: borrowing cheaply on international markets and then re-lending to low- and middle-income clients at rates lower than what those countries could get on their own. To protect its bond rating, the World Bank will have to watch its lending levels, further restricting the institution’s options and making it more reliant on non-core funding, such as trust funds.

The World Bank has weathered U.S. disinterest before, eventually being rescued by a global crisis or change in U.S. administration. How much damage is done now depends on how long the current partisanship lasts, whether the administration goes from disinterested to hostile, and how other donor countries—and World Bank management—respond. While the rise of China poses a long-term challenge, the disinterest of Trump in multilateral matters poses a more daunting and more immediate problem.