The Zedillo Commission Report on World Bank Reform: A Stepping Stone for the G-20 Summits in 2010

Introduction

In October 2009, the high-level commission led by former Mexican President Ernesto Zedillo to review reform of the World Bank published its report “Repowering the World Bank for the 21^st Century.”[1] The Commission’s efforts coincided with one of the world’s worst financial and economic crises and came in the wake of a G-20 call for reform of the international financial institutions. The Zedillo Commission offered a unique opportunity to create the foundation for far-reaching reform of the World Bank as the premier global financial institution supporting sustainable global development and poverty reduction. The Commission’s report provides many sound recommendations that serve as an important building block for World Bank reform, but additional elements will be required for a comprehensive approach.

According to the World Bank’s Web site “[t]he Commission was created by World Bank Group President Robert B. Zoellick in October 2008 to focus on the modernization of World Bank Group governance so the World Bank Group can operate more dynamically, effectively, efficiently, and legitimately in a transformed global political economy.” The report accordingly devotes most of its analysis and all of its recommendations to issues of governance. It offers no explicit recommendations on the World Bank’s mandate, operational challenges and modalities and its funding, although these topics are discussed at the outset in setting the stage for the analysis of governance reform.

Governance and mandate issues are interconnected: member countries will only give the World Bank an ambitious mandate if it is underpinned by strong governance; and they will only make serious efforts to strengthen the Bank’s governance if the Bank makes a clear and significant contribution to address global challenges on their behalf. Since the Commission focused only on governance reform, a key element of World Bank reform remains to be addressed. A “grand bargain” may need to implemented in order to turn the World Bank into a truly legitimate and effective global institution.

Reform of World Bank Governance

The report rightly identifies governance weaknesses as having undermined the World Bank’s legitimacy and effectiveness. Its analysis of the governance weaknesses is informative, perceptive and comprehensive in coverage—considering not only IBRD and IDA, but also including IFC and MIGA in its ambit. It formulates a concise and overall sound set of principles of good institutional governance and addresses the key governance issues in a broad sweep of recommendations while understandably leaving many details of implementation yet to be addressed. The main recommendations fall under four headings:

1. Reform of representation (chairs, vote and voice):

• The proposal to reduce the size of the Board to 20 chairs by consolidation of European seats, creating elected-only chairs and distributing board membership more evenly across constituencies, is welcome. With the signing of the Lisbon Treaty, the Europeans should address their fragmented and excessive representation in many international bodies, including the World Bank. Otherwise, they will seriously undermine the Bank’s legitimacy.
• The goal of a 50/50 voting structure for the Bank between developed and developing countries and a significant increase in the basic shares and hence votes is a welcome recommendation. It sets a clear goal for rebalancing of the ownership of the institution.
• The proposed elimination of the U.S. veto is also welcome. A key question left unanswered is how this could be made palatable to the U.S. administration and Congress.

2. Restructuring governing bodies:

• In principle, the proposal of a nonresident, ministerial-level board of executive directors is fine, yet likely unrealistic in practice: member governments are not likely to forego a resident-board approach; and if it were adopted, it is unlikely that ministers would spend the time required to serve in this capacity. Other options should be explored: reformed representation, a clearer strategic role for the Board, giving the Board its own leadership, and a stronger mandate for the Bank (see below) would help make a more effective and attractive institution.[2]
• The proposed delegation of approval of individual loans, which is currently reserved for the board to the management will strengthen the Board’s focus on strategy and policy formulation process. This will also allow a reduction in the size of the board’s costly staff and make it easier to attract senior-level board representation.
• The proposal to have the Board chaired by a government representative, rather than by the President, is also appropriate, but the traditional rules of selecting the Board’s leadership (the “Dean”) purely by seniority should also be abandoned. Instead, a process of election by the members should be introduced.

3. 
   Changing leadership selection: It is appropriate to eliminate the U.S. prerogative in the World Bank, and the European prerogative in the IMF. Merit-based leadership selection, as recommended by the report, is more appropriate. While this principle appears to have been adopted at the G-20 summit before the Commission issued its recommendation, it remains to be implemented in practice.

4. Increasing the World Bank’s funding base: The report correctly identifies the need to increase the World Bank Group’s resource base, but says little about which resources should be increased, why and by how much. The justification for a capital increase needs to be articulated more clearly, the case for an early and ambitious replenishment of IDA needs to be made explicitly, and the potential role for the Bank in acting as a channel for global public goods funding (especially climate change funding) needs to be clearly laid out.

The World Bank’s Mandate

It is encouraging that the Commission portrays the World Bank as an institution that has a continuing and enhanced role to play. The proposals for governance reform are intended to strengthen its legitimacy and capacity. The report also identifies important challenges in the current and future global environment, but presumably because of its limited terms of reference, it does not lay out a clear vision of the mandate and role of the Bank in the face of these challenges, nor does it closely link the governance reform proposals to the changing challenges and mandate of the Bank.

Three challenges stand out in particular[3]:

• Supporting growth and poverty reduction in middle-income countries: The report identifies the challenge of the Bank to stay engaged with middle-income countries (MICs), but does not propose a clear rationale for this engagement, nor does it state what specific role the Bank should play in MICs, what needs to be done to play this role effectively, and how the proposed governance reforms would help it doing so. Enhanced representation of the MICs in the Bank’s governance would be one way to strengthen their trust in the institution and ensuring that the Bank adjusts its operational modalities in a way that is responsive to MICs’ needs.
• Supporting the provision of global public goods: The report identifies global public goods (GPGs), such as environmental protection, response to epidemics, protection of global financial stability, etc., as an important challenge, but does not specify what role the Bank should play and what reforms are needed for it to play this role. And again no link is established with governance reform. MICs in particular have been resistant to a stronger Bank role in GPG funding. Giving them greater voice and vote in the Bank would likely lower their resistance. In terms of funding, it will be important to explore making the Bank the principal conduit for GPG funding.
• Supporting the coordination of aid: The report flags the rise of new aid actors and the resulting fragmentation of the aid architecture, and lays out the great challenges that donors face in conflict-affected countries. However, it does not identify what role the Bank could and should play in helping to make the aid architecture function better or what specific role it should play in aid coordination. One option to consider is for the Bank to play a lead role in coordinating aid in conflict-affected and fragile states–and indeed, in all countries where governments cannot or will not play such a lead role.

Searching for a “Grand Bargain” in World Bank Reform

Reform of international institutions requires a careful balancing of multiple and, at times, diverging national interests. The U.S. has an interest in maintaining its prerogatives of selecting the World Bank president and wielding a veto when it deems appropriate. The Europeans want to maintain their strong presence on the Bank’s board and protect their prerogative of appointing the IMF’s Managing Director. The developed countries as a group have an interest in promoting an effective response to GPGs and in improving better coordination of aid in conflict-affected and fragile states. The middle-income countries want greater voice and vote in an institution that is designed to support them in their long-term development aspirations and during times of crisis. The low-income countries, which critically depend on the World Bank along with other donors for concessional assistance and crisis support, want a greater say about the conditions on which funding is made available to them and about the quality of technical advice and assistance they receive.

It is clear that governance and mandate issues are closely related. Proposals for World Bank reform that do not explicitly consider how to balance these national interests across these two domains—governance and mandate—are not only incomplete by also face a great risk of stalemate and ultimately failure.

By focusing only on governance, the Zedillo Commission was unable to explore how the many differing national interests could be brought under one hat in the form of a “grand bargain,” in which different participants are willing to compromise on some of their interests so as to achieve others.[4] Had the Commission been given a broader remit, it could have explored the creation of a World Bank that can respond to:

• the interests of developed countries by helping to ensure sustained growth and poverty reduction in the developing world, by responding to the critical need to address GPGs, and by providing leadership, with responsibility and accountability, in aid coordination in conflict-affected and fragile states; and
• the interests of developing countries by giving them a greater role in the Bank’s governance and hence greater trust in the institution in letting it play a key role to assure a stable, prosperous and sustainable world economy.

The developed countries would then be more likely willing to forego some of their traditional prerogatives in the governance of the institution; and the developing countries would likely be willing to give the World Bank a greater mandate in assisting them to respond to global challenges.

As the G-20 leaders prepare for their 2010 summits in Canada and Korea, they should demand from their deputies and sherpas, and from the World Bank’s leadership, that they take a broader perspective of the reform agenda, drawing on what is a sound analysis of the governance challenges offered by the Zedillo Commission Report, but staking out a much more ambitious and far-reaching set of reform measures for the World Bank. By combining reforms in the World Bank’s governance and in its mandate, the leaders can create a package that responds to the valid interests of all participants, and to the urgent global developmental needs and to the challenges of global public goods.

[1] The Commission was established by World Bank President Robert Zoellick and reported to him, not to the World Bank’s Board of Governors or Board of Executive Directors. The formal name of the Commission is “The High-Level Commission on Modernization of World Bank Group Governance.” The World Bank Group consists principally of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA).

[2] The proposed resident advisory council would place a bunch of bureaucrats in Washington with the only responsibility of kibitzing on what management does, but with no functional responsibility. There is little justification for this, and it is unlikely to be acceptable to member governments.

[3] See also Johannes Linn, “World Bank Reform: Proposals for the Next G-20 Summit,” February 25, 2009

[4] For an exploration of the potential role of a “grand bargain” in global governance reform see Colin Bradford and Johannes Linn, “Introduction and Overview,” in Bradford and Linn, eds., Global governance Reform: Breaking the Stalemate. Washington, DC: Brookings Institution Press, 2007.