Peterson Institute for International Economics

The World Bank’s Next President Must Arrest Its Institutional Decline

The World Bank is the second best international organization after the International Monetary Fund (IMF) in terms of reputation and quality, but it is an institution of diminishing significance. Its current president, Robert B. Zoellick, is stepping down at the end of his five-year term, and the Obama administration has announced that it will nominate an American to replace him. Other countries will put forth their candidates, and there could be a spirited worldwide contest for the job. Thus it is important that the selection be based, not on the politics of an American versus someone from another country, but on the challenges the Bank faces. The automatic American monopoly on the presidency should give way to a worldwide meritocratic selection process.

The World Bank achievements are considerable. First, it is the best institution for development economics and public policy in the world, with a staff consisting of thousands of specialists with PhDs from the best universities. Second, it is a universal governmental organization including all significant countries. Third, its mandate is to be in charge of global economic development.

Well, if the situation is that good, what is the problem? The World Bank is swiftly becoming financially irrelevant. Its share of financing to the developing world is quickly shrinking as huge private financing is becoming available and the World Bank stays put. Services of the World Bank are considered to beboth expensive and inefficient by people who work with the bank. The World Bank has been compared to Gosplan, the old Soviet state planning agency, which demanded some 50 plan indicators because 50 different bureaucrats all wanted their own plan indicator. Worse, the World Bank is often unable to provide relevant answers. These concerns of declining quality and relevance need to be addressed.

The dilemma of the World Bank is all the more obvious if we compare it with the IMF. Before the global financial crisis of 2008, some considered the IMF irrelevant. Managing Director Dominique Strauss-Kahn got rid of one-quarter of the qualified professional staff in the spring of 2008, believing that no financial crisis was likely to occur any time soon. This was an amazingly foolhardy mistake.

Even so, in October 2008 the IMF got into action. By April 2009, the G-20 decided to quadruple the financial resources of the IMF. The IMF is back and few question its relevance. The IMF is the master of about one trillion dollars, while the World Bank is able to lend $20 billion in one crisis year. Nobody doubts that an IMF mission can be in place within a week if necessary, while it can take months before a World Bank mission arrives.

The World Bank has expanded its lending during the crisis, but its role remains uncertain, and its financing equally so. What does the Bank really stand for and how leisurely can it afford to be? A new president of the World Bank needs to offer a clear vision of what the World Bank should do and how. Professor Jeffrey Sachs of Columbia University—previously an adviser to the United Nations and many transition and developing countries—has put his name forward for the bank presidency and also outlined such a vision.

The fundamental dilemma of the World Bank is that it faces myriad issues. It should, however, concentrate on a limited number of these issues related to its outstanding competence. In practice, however, the Bank does everything that its members ask it to do. By contrast, the IMF is disciplined and sticks to its core competence.

The World Bank has an objective function that looks like a hedgehog,  with hundreds of programs and a matrix organization shooting off in different directions. Such an organization cannot work. Among the bank’s former presidents, only two are considered to have been able to manage it: Robert McNamara, the former Defense Secretary and architect of the unsuccessful Vietnam War, who served from 1968 to 1981, and James Wolfensohn, the Australian-born investment banker who served from 1995 to 2005.  The other presidents floated on top of the bank, while the bank managed itself.

A new president of the World Bank needs to do three things: first, clarify the mandate of the institution so that it concentrates on key tasks; second, reorganize the World Bank to make it manageable; and third, change personnel policy to enhance quality.

The Bank should focus on three core areas: economic development, state reform; and combating poverty.

Economic development is the oldest and most basic objective of the World Bank. In the original interpretation, this amounted to development of agriculture, energy, and infrastructure. Economically and financially, these are straightforward issues, and there is no reason not to continue the strength of the World Bank in these areas. Public investment in infrastructure is a serious development issue, and sound government policy is needed for the development of agriculture and energy.

Reform of the state has received too little attention in the World Bank, but this is a core World Bank area, without much competition from other organizations, with the exception of the United Nations Development Program. In all too many countries, the government suffers from the greatest malfunction. In the past the Bank has been too timid in its efforts to build governing institutions, civil society, and judicial systems. In the 1990s, the Bank had clear answers in the so-called Washington Consensus, which favored reasonably free market economies. But in the late 1990s, Joseph Stiglitz disputed this consensus as chief economist of the Bank. Yet he had nothing to offer to replace what he was criticizing, only vague suggestions that the issues were much more complicated.

None of these problems should deter the bank from its pursuit of reforming the states that receive its funds and attention, and to concentrate on a limited number of achievable goals. If a development agency is to be relevant, it has to master the ability of meaningful simplification. As Goethe put it: “A master proves himself in the limitation.” This requires a clear vision of the new president and political support by the membership.

In the last two decades, one of the most successful World Bank activities has been pension reform. This was a case of the Bank working at its best. To begin with, it carried out comparative empirical research throughout the world. After having done so, it established a lucid model, its three-pillar model with a basic public pension, compulsory private pension saving, and voluntary private pension saving. In 1994, it published a normative book Averting Old Age Crisis, with clear recommendations. Ever since, the Bank has promoted this model with considerable success through much of the world.

In fact, the ideological differences over the building of the state have rarely been smaller in the world at large. Old-style state-oriented socialism in the developing world is virtually dead. Countries seeking to grow economically have become even more forceful advocates of normal market economics than the Western world, even if large state companies remain prominent. Europe is dominated by moderate center-right governments. This is a good time to revive and reformulate the Washington Consensus as a program for World Bank activity. In order to do so forcefully, the Bank needs to redirect larger resources to its research, which has been watered down during the last decade and a half. All answers must be based on up-to-date empirical research, and when the outcome of the research changes, the answers must change.

As soon as the new World Bank mandate has been formulated and adopted by its board, its organization needs to be streamlined so that the institution becomes manageable again. That will not be easy, but it is vital for the Bank’s survival.

In addition, the Executive Board and its role need to change. At present, its 24 executive directors, each with a significant staff, meet almost continuously, acting like a duplicate management board. Instead, the Executive Board should become a normal supervisory board that meets once a quarter or so and decides on strategy rather than each detail.

The most sensitive issue is personnel policy. While the IMF consists of an elite corps recruited after graduate or doctoral studies at the best universities in the world, that route is only one of three recruitment streams at the World Bank. It has substantial local recruitment around the world, and thousands of staff have been promoted because of seniority and not on merit or hard work. A third stream consists of short-term consultants, many of whom become full employees eventually. They are often too insecure to work well.

This personnel policy has serious drawbacks. Since the competence of the World Bank staff varies greatly, the quality of its work varies correspondingly. Because of a large share of the staff is substandard, the highly qualified staff have to work all the harder, effectively punished for their competence. Because of the lack of clear lines of management, promotion depends to an inordinate extent through networking, which seems to be the dominant pastime at the Bank. This renders the Bank much more closed to the outside world than the IMF with its clear, hierarchical organization. The Bank needs to go back to basics, making recruitment of highly qualified young professionals the all-dominant source of employees once again.

In conclusion, the World Bank needs a president with a clear vision of economic development and of what role the Bank should play. This vision must also clarify what the Bank should not do. No standard retired politician or businessman is able to fulfill this criterion. An empirical economist with substantial knowledge of development is desired.

The second criterion is great personal and political strength, which is necessary if the president is to impose such a policy on a difficult and reluctant organization. Such strength is also need to maintain substantial support from both recipient and donor governments. Nobody benefits from another president being effectively ousted by the staff, which happened with Paul Wolfowitz in 2007. The legitimacy of the president would rise if the requirement of American citizenship was ended, but it would be even better to abandon any affirmative action and opt for meritocracy. The candidates should present themselves openly, as Jeffrey Sachs so appropriately has done, rather than being imposed by the US Treasury, a strategy which has fortunately not presented any candidate as yet.

15 Responses to “The World Bank’s Next President Must Arrest Its Institutional Decline”

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