IFI governance


Which way the World Bank?

13 June 2005

A report from the Bank’s evaluation department assessing its contribution to growth and poverty reduction has provoked renewed debates over what development means and what the Bank’s role in it should be. As Paul Wolfowitz begins his presidency, a dividing line is being drawn between advocates of economic growth driven by big infrastructure and those defending re-distribution through the provision of social services.

Protests greeted Wolfowitz at his first day on the job in Washington 1 June. A letter from over 300 civil society organisations in 60 countries laid down benchmarks by which they said that Wolfowitz would be judged. These included a u-turn on World Bank calls for an end to food subsidies in Iraq, and an extension of Iraqi debt cancellation to other countries whose debts were racked up by “unrepresentative, oppressive and corrupt governments”.

In his first press conference at the Bank, Wolfowitz was at pains to illustrate continuity with the direction taken by his predecessor, James Wolfensohn. Africa, good governance and ownership were stressed. However Wolfowitz also said that he wanted to make World Bank loans more attractive to middle-income countries such as China and India and put more emphasis on infrastructure projects: “We have raised the transaction costs of dealing with the Bank and we need to look at that.” These priorities echo those put forward by a working group of the Washington-based thinktank Center for Global Development (CGD) in a new report entitled The Hardest Job in the World. CGD has called for a “revitalisation” of the Bank’s role in China, India and the middle-income countries, pointing out that the narrow range of financing products available and the “hassle” of transaction costs had led to a severe decline in Bank lending to these countries.

inadvertently downplaying the role of certain sectors such as infrastructure

My pillar is bigger

The respective effectiveness of growth and social services in reducing poverty is the main theme emerging from the Operations Evaluation Department (OED) annual review of the effectiveness of Bank lending. The report is organised around the two ‘pillars’ of the Bank’s work elaborated in the 2001 Bank strategic framework: building the climate for investment, jobs and sustainable growth; and empowering poor people to participate in development.

On the first pillar, the report finds that there is an “urgent need” to assess the impact of the Bank’s work on public sector governance, citing “little evidence that governance is improving and corruption decreasing”. This observation is backed up by a new report from Bank economists Kaufmann and Kraay which finds no significant global improvement in governance indicators in the eight years since they started measuring them (see page 4). During that time, spending on public expenditure management, rule of law and administrative reform grew steadily, while that on privatisation and infrastructure fell (the latter has rebounded more recently).

The report argues that whether infrastructure services are publicly or privately owned matters less than that they are provided in a “business-like manner”. It notes however that all but one of the best performing countries “have not implemented large-scale privatisations and have borrowed less than the other countries for privatisation”. On extractive industries, the report concludes that the Bank “should sequence governance work in the extractive industry sectors ahead of promoting new investments”, a recommendation similar to that of the Extractive Industries Review of 2003 which has been sidelined by the Bank.

On the second pillar of the Bank’s work, empowering poor people, the Bank comes in for some tough criticism. The Bank has conflated increased expenditures in education and health with reducing poverty, says the report, but “their actual impact on poverty has been inadequate”. Furthermore, the Bank’s work on empowering the poor has failed to demonstrate the poverty impact. The authors find that social development activities “are often limited to small parts of projects or are too rushed or superficial”; poverty and social impact assessments are carried out far less often than envisioned; community development projects establish parallel structures which have “weakened the capacity of local governments”; and participatory initiatives undertaken by governments in the context of drafting PRSPs “waned once the PRSPs were completed”.

Supporters of a return to a focus on infrastructure-driven growth have used the report to bolster their case. But a more careful reading of the OED report suggests that its authors agree with the Bank’s current approach of highlighting both growth and the social aspects of poverty reduction. Their fear is that the Bank is overlooking interactions between the two aspects of poverty reduction “inadvertently downplaying the role of certain sectors – such as infrastructure, rural and urban development and environment”. However, while the report rightfully calls for greater evidence of the poverty impact of expenditures in education, health and public sector governance, it fails to demand the same standard of the rest of the Bank’s portfolio in investment climate reform, infrastructure, extractive industries and trade.

On the question of infrastructure, the report avoids asking what kind of infrastructure is needed for equitable, sustainable growth. Will the Bank return to environmentally unsustainable infrastructure oriented towards the export of raw materials? Or will it support the transfer of environmentally sound technologies and infrastructure that helps to develop domestic productivity and markets?

Democratic double standard

Any discussion of the future role of the Bank gets stuck on question marks over the Bank’s legitimacy. In his report on reform of the UN system, secretary general Kofi Annan said that “more significant steps are needed to overcome the widespread perception among developing countries that they are under-represented in both [the Bank and Fund], which in turn tends to put their legitimacy in doubt.” The report by the Center for Global Development cited above suggests four specific initiatives to “re-establish the legitimacy of the Bank’s governance”:

  • formalise a credible, rule-based, transparent mechanism for choosing the Bank’s president;
  • provide two additional seats on the board for African countries;
  • make an independent and public assessment of voting shares and board representation including options for changes; and
  • commission an independent review of board functions and responsibilities.

A new report commissioned by the Friedrich Ebert Stiftung Foundation by Messner et al. comes up with some interesting suggestions for governance reform. In addition to recommendations on the reform of voting shares and board seats, the report advises:

  • the creation of advisory boards for country directors;
  • the elimination of loan volume criteria from staff appraisals; and
  • the creation of an autonomous evaluation unit akin to the IMF’s Independent Evaluation Office (it’s worth noting that a similar proposal is put forward in the CGD paper).

The direction that Wolfowitz takes on infrastructure, governance and other reforms in the coming months will play a key role in determining how civil society interacts with the institution during his presidency. The issue of whether or not to engage with Wolfowitz’s Bank, and if so how, has become a high profile one in recent months. Over 60 organisations from 25 countries decided to boycott the Bank’s Global Policy Forum in April (see Comment) which had been established to allow interaction between civil society organisations and high-level management at the Bank. The main concern of boycotting organisations was over the accountability of the Bank to previous engagements with civil society around dams, structural adjustment and extractive industries. Lidy Nacpil of Jubilee South said that activists “must make clear that until the World Bank takes civil society and its concerns related to economic and environmental justice seriously, we will not provide platforms where it can claim otherwise.”

Similarly, NGOs were divided over a decision to host a send-off for outgoing president James Wolfensohn in May. The list of sponsors included InterAction, Oxfam, WWF, CARE, Conservation International and Save the Children. Organisers said the reception recognised Wolfensohn’s “personal role in creating space for civic engagement.” Groups such as Focus on the Global South denounced the party. “Celebrating Wolfensohn in a party by some organisations that say they represent poor people actually threatens to honour him for something which he did not do”, said Shalmali Guttal. “How could those organisations allow the Bank to rewrite history? It undermines the struggle of people who have fought for years and years.”