By Ajay Chhibber
The
World Bank (WB) was set up as the International Bank for Reconstruction and
Development (IBRD) in 1946 as a sister institution to the
International Monetary Fund, the Bretton Woods twins, to help fund reconstruction after World War 2. The
International Finance Corporation (IFC) and the
International Development Association (IDA) came in the 1960s to promote private enterprise and provide concessional finance to low-income countries, respectively.
In the 1970s, WB president Robert McNamara shifted the Bank’s focus to fighting poverty in developing countries. Even with huge decline in poverty in many parts of the world, especially in Asia, that battle is not fully completed. But it should now be focused largely on a smaller group of fragile States, predominantly in Africa. Poverty still exists in middle-income countries like India, but is on track to decline. IDA grew hugely during this period, partly also through reinvested profits from IBRD loans to middle-income countries.
While extreme poverty has declined, inequality — in income, gender and by identity — joblessness and rising social tensions, and lack of adequate infrastructure and institutions still hold back development. New global challenges of climate change, migration and transmission of diseases require new more innovative approaches.
In this changed world, some argue that WB should shrink and focus on only the low-income and fragile States. That would be a mistake.
India has been the largest recipient of WB financing. It has received over $100 billion — almost half of it in IBRD loans and half in IDA — which will end soon. IFC has invested almost $15 billion from its own and associated sources. This has helped India, but is now a small contributor to its development needs. What low middle-income countries like India — whose per-capita income is around $2,000 — need are huge amounts of capital to propel their development in an inclusive and sustainable manner, and ensure they are not stuck in a ‘middle-income trap’.
Build Institutions
WB must be made fit for the five following purposes:
1- The IBRD part of the institution, for which it was originally set up, has grown less relevant but needs to be revived. Today, the world has large financial savings looking for return, and many low- and middle-income countries are starved of capital, especially for infrastructure. WB’s loans now, typically, provide a tiny fraction of those financing needs. It is becoming a bit player in countries like India. But this could change.
WB’s instruments allow it to not just provide loans, but also guarantees — to leverage in private capital. But this instrument has seen surprising limited use. By shifting to greater use of guarantees, WB could greatly leverage its limited capital to increase private flows and, unlike the Chinese Belt and Road Initiative (BRI), show how to do this without it becoming a huge debt burden on poor countries.
In the same vein, WB could become a major financier of insurance systems. It could provide back-stop financing to crowd-in much larger funds through reinsurance for disasters, health, crop and broader infrastructure insurance. Better insurance systems also help improve building and production standards, and more resilient infrastructure. It has financed a few back-stops for insurance programmes but could do a lot more.
2- WB should focus its loans not on financing infrastructure but on helping build the institutions and regulatory systems to crowd-in private capital. Financing yet another school, health centre, road, dam, irrigation system, power plant or rail line is not what it should use its limited capital for. Instead, it should help build the road, rail, airport authority, the energy and telecom regulator, the judicial and governance systems that will help the country attract private capital.
3- Third, in many low-income and fragile States, the need for low-cost IDA financing will remain for some time. But these financing mechanisms have often become a crutch from which countries find it hard to be weaned away. WB should help these countries set much clearer timelines to graduate, and be rewarded for doing so. At present, the incentives are to hang on to soft financing. It remains in WB’s interest to perpetuate such dependency. And IFC should shift its concentration on large corporates to micro, small and medium enterprises (MSMEs) and help financial inclusion.
4- WB must make gender and other social inequalities a central focus of its activities, and not just an add-on. No country has grown rapidly if half of its population is not being allowed to realise its full potential. This would require systemic change in public finances, gender budgeting, targeted social programmes and quotas to political systems — parliaments, local bodies — as well as special programmes for women’s economic empowerment. India would benefit hugely from such a focus.
The Right Climate
1- Global public ‘goods’ and ‘bads’ — climate change, diseases and migration — need huge attention, for which no other institution has better financing and convening power than WB. IDA could be increasingly focused on these activities as well as to complement climate finance funds. India still needs concessional climate financing for its renewable push, especially wind and solar.
If WB can transform itself under a new leadership, it can help low middle-income countries like India eliminate poverty, and help it achieve its dreams of shared prosperity in a democratic system in a sustainable manner.
(The writer is visiting scholar, Institute of International Economic Policy, George Washington University, US)