World Bank Reform: Landing as a Tiger or as a Housecat?

At the Annual Meetings of the World Bank and IMF in Marrakech in October, the governors of the World Bank agreed upon next steps in the Bank’s “Evolution Roadmap.” The level of ambition is still high, but big reform is far from a done deal. Looking to the past, there has been no shortage of World Bank reforms that looked like a tiger in design and ended up as a housecat in implementation. And in fact, it is quite easy to sell superficial tweaks as pathbreaking reforms. Some opponents to major change just follow Tancredi Falconeri’s approach in The Leopard, a film based on the novel by Giuseppe Tomasi Di Lampedusa: “If we want everything to stay as it is, it is necessary for everything to change.”

It is too early to say whether the various promised World Bank reforms will be substantive. In fact, there has been progress in some areas: the agreements on a new vision and mission, on becoming more lean, on working better within the larger multilateral development bank (MDB) system, and on exploring further changes in the MDBs’ financial model. But the character of those decisions is partly aspirational and insubstantial. Everybody interested in getting a tiger, rather than a housecat, is well advised to closely follow this reform process in the run up to the COP28 next week and the Spring Meetings next April.

Important questions need to be answered: what does a “tiger reform” look like? And what needs to be done to declare victory? The UK think tank ODI has identified some areas where more progress is needed, such as a strong IDA21 replenishment, finalising a new type of scorecard for the entire World Bank Group, operationalising the agreed principles of concessionality, and making headway on implementing the recommendations of the G20 Independent Review of the MDBs’ Capital Adequacy Framework. I would complement those areas by adding three more specific issues.

Integrating global public goods into the operational model

In the face of proliferating transboundary crises, there is broad agreement that the MDBs must step up their game to become key providers in the provision of global public goods (GPGs). MDBs have a necessary role to play here, as countries have a rational interest to maximise domestic benefits and hence might not always chose projects with positive transboundary effects. But progress in incentivising the provision of GPGs within the Bank’s operational model has been limited so far.

The first step would be to clearly define what a GPG is. And here the problem starts. The Bank’s management has already suggested (and the Bank’s Governors endorsed at Marrakech) eight global challenges, namely (1) climate change adaptation and mitigation; (2) containment of fragility and conflict; (3) pandemic prevention and preparedness; (4) energy access; (5) food and nutrition security; (6) water security and access; (7) enabling digitalisation; and (8) protecting biodiversity and nature. This raises the question: what is left out? It is obvious that very few current World Bank lending operations would not fall under at least one of those categories. The consequence is clear. If everything is a GPG, “everything stays as it is”: the incentives would apply to everything and hence nothing. Therefore, the key question is still not answered: what are the key GPGs for the Bank’s purposes?

The actual economic definition of a global public good is very clear: a good that does not dwindle in supply as more people consume it and which is available to all citizens. In economic terms, non-rivalry and -excludability applies. There is no doubt that investments, for instance, in digitalisation and nutrition are key for development, but it is very questionable that non- excludability and non-rivalry apply. Therefore, some of the Bank’s eight areas do not qualify as GPGs. This long list is also at variance with former Bank papers where the list of GPGs was much more restrictive and concise. Interestingly, a recent comprehensive study commissioned by the German Development Co-operation und conducted by Oxford Economics suggests four GPGs: climate change, biodiversity loss, pandemics, and fragility.

A full integration of the GPG agenda into the Bank’s entire work would be desirable. But as it seems very difficult to agree on a definition of relevant GPGs, this first-best solution unfortunately does not appear realistic. Therefore, the related discussion now focusses on a more limited approach: how can the Bank ring-fence possible new financial resources for GPG-related lending? If done well, this second-best solution could still qualify as a “tiger reform.” Here are the core elements needed to make ring-fencing work:

1. An incentive and allocation framework for all additional resources, in particular grant money, including the existing GPG fund, and leveraged resources made possible through hybrid capital and guarantees. The financial incentives should be considered a “continuum” including additional lending (i.e., topping up country allocations), longer tenures, and interest rate buydowns for GPG-related activities. The signal to clients would be clear: it pays off to do projects with transboundary effects. The new country engagement model must then translate those incentives into operations on the country level.

2. An impact and monitoring system, which enables the Bank’s management and board to define, measure, and monitor development impact, including externalities for all projects and programmes. It should be based on already existing approaches, in particular the International Finance Corporation’s AIMM and the European Bank for Reconstruction and Development’s TIMS. This system would be used to assess the type and scale of financial incentives for all lending operations under the new framework. At a later stage, it could be extended to all World Bank operations.

3. Baselines that benchmark existing GPGs lending. This would allow monitoring of the additionality of GPG-financing generated by the additional resources.

4. A scorecard for the activities financed by the additional resources, with ambitious indicators tracking transboundary externalities. This scorecard must be coherent and, preferably, fully integrated into the Bank’s overall scorecard.

Private sector enabling

It is almost a no-brainer that huge amounts of private investments will be needed to cope with the growing development and transition challenges. It is also broadly acknowledged that the MDBs are lagging behind what could be achieved by bringing private investors on board. There have been numerous calls on the MDBs to step up to the plate. Only a few days ago COP28 President-designate Sultan al-Jaber called on MDBs to focus on mobilising and catalysing private sector investment and to help establish a new framework for climate finance. This would first mean overhauling and scaling-up various mobilisation instruments, such as blended finance. Secondly, it would mean catalysing private investments by improving regulatory frameworks and reforming fiscal and financing policies as well as complementary public investments. This second dimension has been largely neglected.

Taking into account this second dimension has an important implication: the MDBs, and in particular the World Bank Group, would have to go well beyond the financing (and sweetening) of individual transactions. They would have to implement a more comprehensive approach, which aims at the creation and transformation of markets, in particular markets for renewables, green transport, and green agriculture. This market-creating approach is more efficient than a transaction-focussed approach, in particular in middle-income countries (MICs) with reasonably well-performing institutions and other favourable pre-conditions. Besides, as the IMF has emphasised recently, this approach is the only feasible one. In order to transform their economies, developing countries simply cannot afford to rely heavily on “spending measures,” such as subsidies and investments; they need to focus more on market-creating macroeconomic and regulatory policy reforms. Otherwise, debt ratios for most a representative MIC would increase by 50 percent, reaching unsustainable levels.

It is good to see that the management of the World Bank Group has more recently acknowledged the need for enhanced “private capital enabling”—the term the Bank uses for describing the above-mentioned catalysation agenda. But now, we have to walk the talk. We urgently need an operational plan to mainstream this private sector agenda across the Bank. This plan should outline the changes needed in terms of targets, organisation, incentives, and instruments. Possible synergies within other MDBs should be explored. The forthcoming COP is a good opportunity to announce such a plan. Sultan al-Jaber has a point!

Besides, the new scorecard under preparation should integrate goals for private sector catalysation (or “enabling” in the Bank’s language), emphasising the role of the Bank in supporting partner countries to adjust their fiscal, regulatory, and macroeconomic policies to the new world of accelerated climate change.

Shared prosperity

As former World Bank chief economist Kaushik Basu emphasised recently, during times of crisis, our instinct is to focus on extinguishing the fire that is closest to us. This risks neglecting to address the root causes of the crises. Rising inequality within many countries is one of those root causes, feeding socio-political unrest worldwide and undermining both the social fabric of individual countries and the global institutions that enable collective action.

The World Bank’s second goal, namely to promote shared prosperity, is measured by the income evolution of the bottom 40 percent of the population. This measure does not adequately reflect the complexity of the challenge of rising income inequality and its effects. It has been emphasised time and again that economic growth has very often benefited a relatively small number of people on the top of the income pyramid. Therefore, the Bank’s shared prosperity measure largely ignores what is happening with the upper 60 percent, 10 percent, 1 percent, and above. Focusing solely on the bottom 40 percent also means ignoring the drivers and implications of this phenomenon. As a consequence, it becomes impossible to draw appropriate policy conclusions, for instance, regarding the growth model needed, or how to strengthen social cohesion and democracy.

This debate on inequality is closely linked to the ongoing MDB reform process. The indicator(s) measuring the World Bank’s second goal, to promote shared prosperity, will be revised. It is key to get it right this time around. Most importantly, a new goal and the respective indicators must focus on within-country inequality and its different dimensions, in particular what is happening at the top of the income distribution, not just the bottom.