Toward a Grand Bargain on World Bank Reform

Leonardo Martinez-Diaz
Leonardo Martinez-Diaz Global Director - Sustainable Finance Center, World Resources Institute

December 16, 2009

The report of the so-called “Zedillo Commission,” otherwise known as the High-Level Commission on the Modernization of World Bank Group Governance, has been out for several weeks now. Convened last year by President Zoellick to advise him on how best to reform the governance of the Bank, the report has made the rounds in Washington, with discussions in several think tanks (including Brookings) and in the Bank’s executive board. It has also been required reading in ministries of finance and development around the world. This week, the report got another airing at the Commonwealth Secretariat in London.

Judging by the reaction so far, the 11-member Commission seems to have hit the right note. The report’s diagnosis provides a solid foundation for discussing what needs fixing. Even if one quibbles with any of the Commission’s two dozen recommendations, its analysis of the strengths and weaknesses of Bank governance has survived unscathed.

So far, the main objection to the Commission’s recommendations has been on the grounds of political feasibility, with critics rightly wondering how a coalition for reform along the lines proposed could materialize. Having left my post as director of the Commission’s secretariat, I now share my reflections on the two major issues of the report: the reasons why reform is necessary and the contours of a political bargain to make it happen.

Is the Bank worth reforming?

All the members of the Commission were true believers in the need for having a well-functioning World Bank Group. Still, it is worth emphasizing why the world is better off with the World Bank than without it. The Bank offers its 186 members three advantages that few other institutions can provide.

The first is economies of scale: the World Bank’s global operations have allowed it to accumulate an unparalleled stock of knowledge—contained both in its documents and its people—about how development works (or doesn’t) in more countries, in more sectors, and over a longer period of time than any other institution of its kind. Given the complexities of economic development, this gives the World Bank a distinct advantage in the provision of development assistance, even if that advantage is not always used as fully as it should be.

Second, the Bank offers its members a mechanism for shielding part of their aid budgets from the vicissitudes of domestic politics. Because bilateral aid agencies are nested in the domestic political landscape, development assistance delivered through them is more likely to respond to commercial pressures from particular industries, to shift with election cycles, and to respond to political calls for rewarding allies or punishing enemies. These imperatives may be important on foreign policy grounds, but they can make development aid flows more volatile and therefore less effective at promoting sustainable development, which is a fragile process that requires patient engagement. So while all donor countries retain their own bilateral aid channels, many choose to deliver some of their development assistance through the World Bank, which can pool together resources from all donors and raise some more in international markets, making aid flows more stable and better suited to long-term development interventions.

Third, the World Bank has long operated on the basis of “country assistance strategies,” providing recipient countries with a process and resources to think strategically about what they need to do to promote development and reduce poverty. New entrants into the aid business—the so-called “vertical” or “global” funds—focus narrowly on achieving results in a single sector or issue area, such as preventing the spread of a specific disease or promoting primary education. While often very effective, these funds do not foster the same kind of country-level strategic thinking that is at the heart of the World Bank’s model, and in some cases they undermine national development strategies by pulling too many resources into a single sector or sub-sector while depriving other parts of the system or economy of resources. Vertical funds are a good thing, but they cannot and should not replace country-based development assistance, which is what the Bank does best.

What needs fixing?

The Commission report points to three areas in urgent need of reform: strategy formulation, voice and accountability. (For the details, see the full report.) The diagnosis covers some 20 pages of the report, but it can be boiled down to these essential points:

  • On strategy formulation, the report is clear: the World Bank Group cannot do everything and should stop pretending that it can. It should be more strategic about where to lead, where to follow and where to stay out, leveraging its comparative advantage to maximum effect and recognizing that it needs to collaborate with others in the larger multilateral architecture. This means recognizing tradeoffs and dealing with them transparently, ending programs that don’t measure up and resisting pressure to be involved everywhere.

The problem is that the institution currently lacks an effective process for formulating what can be truly called a strategy; that process needs to be put in the hands of the president, who proposes, and of a strategic board, which disposes. Today’s board of 25 directors, bogged down with the minutiae of loan approvals and day-to-day management, cannot realistically be an effective body for strategy formulation.

  • On voice, the report argues that voting power and board representation should be fair—commensurate with members’ willingness and ability to contribute the Bank’s resources but also reflective of the fact that it is recipients who must deal with the consequences of development interventions. Right now, the Bank’s governance arrangements over-represent European countries, under-represent some of the largest emerging economies (especially China), and have allowed the voice of the poorest countries to erode over time.

Part of the problem is that the Bank does not have regular, automatic quota reviews as does the IMF, where shareholding is reviewed every five years to account for changes in members’ relative economic size and other indicators. Over time, this generates large misalignments in Bank shareholding, which must then be settled with highly political—and ultimately arbitrary—adjustments. The so-called “U.S. veto,” which only applies to one decision (amending the Article of Agreement) has much symbolic impact, reinforcing perceptions that the Bank is a tool of U.S. policy.

  • Finally, the report points to several gaping holes in the accountability structure: the board of directors shares a co-managerial role with management, and therefore cannot pass judgment on management’s performance without also passing judgment on its own performance (an obvious conflict of interest); there is no performance review for the president and no list of qualifications for board directors; the Bank’s evaluation organs need beefing up; and the process for selecting the president is opaque and remains essentially the privilege of only one government, or at best, a very few governments.

Why do these governance weaknesses matter? Put simply, because they undermine trust in the World Bank. Without an effective strategy and with little accountability for results, the world’s traditional donors would rather channel their development assistance through bilateral channels or trust funds, where they can set strategy and hold managers to account. Without sufficient voice for large emerging markets, these countries would rather rely on bilateral channels and regional organizations, where they have more voice and decision-making power. And without sufficient voice for the poorest countries, leaders in those nations are loath to borrow from the World Bank for fear of a political backlash at home.

The danger is therefore a world in which the World Bank is increasingly marginalized or “hollowed out” by institutions for development assistance that offer none of the advantages of true multilateralism, leading to a world where development aid is more politicized, more fragmented, and less effective at promoting long-term development.  

This is not hypothetical danger. The number of trust funds (which are administered by the World Bank but are controlled by a few donors) has grown to over 1,000. Last fiscal year, disbursements from Bank-administered trust funds were equivalent to 50 percent of total IBRD disbursements. Meanwhile, China has channeled billions in aid to Africa through bilateral channels but contributed only a mere $30 million to International Development Association (IDA), the Bank’s discount window for the poorest countries, in the last replenishment cycle—that’s less than New Zealand or Greece.

Toward a political bargain

Implicit in the Commission’s detailed recommendations are five principles that should guide any future “grand bargain” to reform the governance of the World Bank:

  1. The United States should retain the power to block policies to which it strongly objects (though as discussed below, this does not necessarily mean preserving the current system of special majorities).
  2. Europe as a whole should be able to block such policies as well, but the representation of individual European countries should be scaled back to open room for others.
  3. The contributions of individual countries to the Bank’s resources should be recognized more transparently in terms of voting and representation.
  4. Large emerging economies, as critical solution-holders to key global development challenges, should have a larger stake in the Bank’s future and should be encouraged to participate more actively in it.
  5. The voice of poorest should be restored to historical levels and protected from further dilution. This is especially important as the “developing world” continues to disaggregate into middle-income and low-income countries with different interests and development needs.

What tradeoffs are necessary to operationalize these principles?

Specifically, the United States would need to:

  • Exchange its monopoly on presidential selection for a much more legitimate presidential selection system that still gives it a veto over candidates to whom it objects but which opens the door to qualified non-U.S. citizens; at the same time, the Europeans would give up their right to appoint the head of the IMF;
  • Exchange its capacity to veto unilaterally amendments to the Bank’s Articles of Agreement for a system that still gives it almost the same power to block unwanted amendments (it would only have to enlist the support of a few small countries amounting to less than 4 percent of total voting power), but which is perceived as much more legitimate; and
  • The ministerial-level, strategic board would ensure that the United States retains a central voice in strategy formulation.

Of Europe, the following would be required:

  • Exchange four chairs in the executive board (those belonging to the smallest European powers) for a system that allows the big European economies to retain four or five chairs while giving developing countries more voice in the body;
  • At the same time, Europe would benefit from a system that weights present contributions to IDA more heavily than old contributions, thus rewarding with more voting power the efforts of IDA’s most generous donors, many of whom are European; and
  • The ministerial-level, strategic board would ensure that European countries retain a central voice in strategy formulation.

The emerging economies:

  • Would benefit from automatic quota reviews and from a move toward greater equity in voting power between developed and developing countries in the IBRD;
  • If they become significant contributors to IDA, emerging economies could also benefit from the heavier weighting of recent contributions; and
  • The ministerial-level, strategic board would offer emerging economies the opportunity—and some would say the responsibility—of contributing more actively to setting the Bank’s strategic direction.

Finally, low-income countries would:

  • Benefit from a permanent increase in basic votes to some 12 percent of total voting power, which would expand and protect the voice of the poorest countries; they would also benefit somewhat from greater equity in IBRD voting power and from a majority of developing countries filling board chairs.
  • The significant reduction in the number of resident board advisors and staff—which is the inevitable result of a shift to a strategic board—would affect low-income countries most; in exchange, new opportunities for capacity-building would be made available at the Bank for promising mid-career civil servants and economists from those countries.

The Commission thought this balance of tradeoffs is reasonable and sketches out the contours of a political compromise. Europe and the United States would make the most concessions in the short term, but they also have the most to gain in the long run from a World Bank that remains at the center of the multilateral architecture. The emerging economies would gain the most in the near term, but future gains will only be meaningful if they decide to become active and responsible donors and shareholders. Finally, the poorest countries see their voice and voting power expanded and secured against further erosion, but they would have to consider an alternative way to keep a resident presence in the Bank.

The pivotal role of the United States

None of this will come to pass without U.S. leadership. The United States has to be the first mover, as it is unlikely that Europe will be able to move first in a coordinated fashion, given that some Europeans have much more to lose in the short term than others.

President Obama instinctively favors multilateralism and global institutions that reflect a more diverse group of interests. He believes this on normative and practical grounds. Normative because all of humanity has a stake in the development challenges the World Bank deals with and should therefore have a voice in the debate. Practical because without buy-in from emerging economies, the probability of addressing these problems effectively is slim.

Selling this deal to Congress and the American public will not be easy. Some of these trade-offs will be dismissed as simply surrendering American power in global institutions. This position is shortsighted and dangerous to long-term U.S. interests. Administration officials must therefore explain clearly why such reform is in the long-term interest of the United States. That argument should include the following points:  

  • The World Bank was created, in large measure, by the United States, and it still has U.S. values at its core: market-based economic development; private-sector-led growth; free trade; technical competence, efficiency, and meritocracy in staffing; and the leveraging of private financial markets to promote development.
  • The United States benefits in several ways from the World Bank: the Bank promotes development that is good for global stability and security, it helps instill U.S. values in elites from developing countries who work inside or with the Bank, it complements U.S. bilateral development efforts, and it provides a forum friendly to U.S. interests from which to engage the world on global issues. And not trivially, it’s a very inexpensive investment given the benefits.
  • Therefore, it is in the interest of the United States to keep the World Bank at the center of the international aid architecture and to encourage emerging economies and other countries to develop a strong stake in the institution, rather than to turn to exclusively to their own bilateral or regional alternatives.
  • The governance structure that secured U.S. control over the Bank—including a very powerful World Bank president hand-picked by Washington—has become a reputational and practical liability that threatens to marginalize the Bank.
  • For that reason, it is necessary to replace some of the old governance structures with new ones that still preserve a strong voice for the United States, but which help keep the institution strong and at the center. This would include, for example, a World Bank president who may not be a U.S. citizen, but who could not be chosen without U.S. consent and who would be more accountable and under greater oversight than the current president. In short, it is better to find new ways of sharing power to keep the Bank relevant and influential, than to remain solidly in control of an increasingly weak and marginal institution.