The World Bank must reform

22 Aug 2023

Opinion: Poonam Gupta.

Overhauls to multilateral development banks could be a lasting legacy of India’s G20 presidency.

Reforming the multilateral development banks (MDBs) is an important aspect of the global reforms agenda under India’s G20 presidency. The World Bank Group (WBG), as the largest MDB, is the most prominent candidate for such reforms. By taking a lead in reforming itself, it can set an example for other MDBs.

The WBG performs three main roles: That of a financier; a knowledge bank; and a trusted advisor. As a financier, it needs to derisk as well as scale up the quantum of lending to its member low-income countries (LICs) and middle-income countries (MICs).

The LICs lack market access. Their economies are smaller and more fragile. They face numerous challenges emanating from natural events, global risk aversion, volatility in global demand, an uncertain trading environment, terms-of-trade shocks, and exchange-rate fluctuations. All these constrain their debt-absorption capacity. The WBG ought to focus on building more resilience and enhancing state capacity of the LICs.

Despite owing half their external debt to the MDBs, the LICs are deemed to be in debt distress. This raises questions about the accuracy of their debt sustainability assessments conducted by the MDBs. The MDBs, including the WBG, reward its staff for clinching new lending business. Fresh lending can be approved only if the country’s debt is deemed as sustainable. This likely incentivises more favourable debt sustainability assessments. To address this, the WBG should conduct more credible debt sustainability assessments of the LICs, considering scenarios entailing exchange rate depreciations, climate risks, and trade wars.

A holistic review of the debt landscape of the LICs, enhanced debt transparency, and diluting their currency risks are essential. Their access to private or dubious sources of bilateral financing should be curtailed, and the share of multilateral funding on concessional rates increased. Coupled with enhanced resilience and state capacity, this can put the LICs on a virtuous path of stability and prosperity.

Conversely, MICs enjoy market access and attract private capital flows. But such flows are fickle. Any change in global sentiment causes speedy reversal of private capital flows. The WBG can stretch the financing envelope of MICs by derisking inflows of private capital. This may be done by offering guarantees, temporary swap lines, or contingency credit lines.

The International Monetary Fund (IMF) currently offers contingency credit lines, but their uptake has been limited due to the perceived stigma attached to being in an IMF programme. A facility offered by WBG is unlikely to carry such stigma simply because, while the IMF lends during an economic crisis, the WBG lends for developmental needs. Operationally, this would entail innovations at its risk insurance and guarantee arm, the Multilateral Investment Guarantee Agency (MIGA).

In addition, it should augment the available funding to MICs for priorities such as climate transition. The Independent Expert Group, set up by the Indian G20 Presidency, has made important recommendations to this effect.

An equally large scope exists for improving the WBG’s delivery as a “Knowledge Bank”. Despite a significant fraction of its operational budget allocated to producing and disseminating knowledge, it has had limited relevance or impact. This calls for commissioning a separate independent group with the mandate to look into the internal organisation and incentives, external engagement, collaborations, and impact evaluation of its knowledge work.

The WBG’s knowledge work is often associated with the publication of cross-country indices. Some of these indices, for example the “Doing Business” index, have repeatedly come under fire for their subjectivity and unreliability. The WBG needs to take a hard look at their rationale, mechanics, and relevance, and revamp and sustain only the most objective and relevant ones. It must also assess the accessibility and country relevance of its scholarly and flagship reports. An example from its engagement in India is telling. India faces many crucial developmental challenges: A persistently low female labour force participation; manufacturing sector in low gear; and the imperative to make its workforce future-ready to serve not just Indian, but also global markets.

The WBG is missing from the discourse on these important issues.

On the other hand, it publishes nearly six growth forecasts on India every year, each one with a large forecast error and no superior accuracy vis-a-vis the others. Since the IMF already publishes similar forecasts, the WBG’s resources could more usefully be deployed elsewhere. Similar shortcomings prevail in its role as a trusted advisor, wherein it is supposed to share relevant cross-country experiences as inputs into complex policy choices that developing countries confront. In the current decentralised model, country staff are not well-versed in global best practices themselves. With little churning in the country offices, even the country-specific knowledge is not refreshed, let alone building an international one.

The WBG needs to deploy more international expertise to advise countries on policy issues on one hand and engage more intensively with local partners on the other. Local institutions work at a fraction of the costs incurred by the WBG; leveraging them would be a sure-fire way to utilise its resources wisely while also attaining relevance and legitimacy.

The WBG is a unique institution and has a lot to offer, but it does not behoove it to act like a monopoly. It should subject itself to greater scrutiny, introspection, and engagement.

The aforementioned reforms are achievable only if the WBG returns to fully work in person, as its client countries have. While the entire developing world has resumed physical work leaving the practices of the pandemic behind, the WBG has mostly remained in remote mode for the last three and a half years. This has been the case at both its headquarters in Washington DC, as well as in its country offices, including in New Delhi.

Reforms of the MDBs, and of the WBG, along the lines proposed in the report of the Independent Expert Group and as delineated here, can be a lasting legacy of India’s presidency of the G20.