Foreign Aid & Civil Society

The World Bank: Inventor of Last Resort?

By Dweep Chanana ⋅ August 27, 2009 ⋅  Email this post ⋅  Print This Post ⋅ Post a comment

In a timely piece on CGDev economist Arvind Subramanian has an excellent suggestion on how to redo the World Bank. He suggests that instead of spending on poverty reduction programs and the like, the Bank should instead spend on global public goods.

Referring to the two Bretton Woods financial institutions, Keynes once wittily observed that the “Bank’s a fund and the Fund’s a bank.” Whether the IMF should continue to be a bank is being hotly debated. But it is in India’s interest to push the Bank to be less of a financial fund and more engaged in generating and financing ideas and technology for development.

It is refreshing to see this idea put forth so elegantly because the timing is right. As India and China rise in the world they have sought more influence over the world’s financial institutions. During the financial crises much attention focused on a potential future role for the IMF. But in an environment where the efficacy of aid has often been questioned, the World Bank is no stranger to questions about its future either.

Back in 2007 the WSJ had suggested that the bank be disbanded altogether given that it did little more than fund corruption. The same year Prof. Bhagwati suggested that the Bank be a think tank of 300, in contrast to the 8000+ it employed at the time. That is not far from what Subramaniam suggests today.

The premise is simple – that the World Bank suffers from an identity crises as a development aid fund. Its “core” business of financing development projects is irrelevant in fast-growing Asian countries that can access market capital. And in poorer countries where private capital is unavailable the Bank is only one of many players. And anyway, according to their research (see PDF papers here and here), development aid has no impact on growth. So, what is the World Bank good for?

Despite this evidence, the World Bank’s current lending practices overwhelmingly favor traditional lending to governments over global public goods. The numbers are difficult to pin down but global public goods financing is unlikely to exceed 20 percent of total World Bank lending. In other words, current practice is inversely correlated with the evidence. What makes this inverse correlation particularly egregious is that there are many suppliers of traditional aid (bilateral donors, NGOs, private philanthropy) but few suppliers of global public goods. The World Bank should be filling the latter empty space instead of further crowding the lending business.

Global public goods remain dangerously underfinanced, notwithstanding the massive amounts raised by the Global Fund and the Gates Foundation for public health. Research into public health, education, access to water, and climate change has been neglected or has often focused on the interests of the developed world. This explains, for instance, why the climate change agenda has focused so overwhelmingly on mitigation issues, rather than on adaptation or insurance against unavoidable changes.

Clearly, we need an “inventor of last resort” to finance research, development, and scaling of technologies that are necessary but for which there is no viable market return. Subramanian puts forward his suggestion as primarily of interest to India and other fast-growing economies. But his proposed realingment would be useful for most developing countries, given the substantial transformative power of such public good investments.

On the other hand, some of the biggest contributions to development have come from global public goods such as the green revolution and the medical breakthroughs, especially related to the development of antibiotics and vaccines. The technical discoveries leading up to the green revolution were financed by official aid and private philanthropy. And the adaptation of the green revolution technologies to varying climactic conditions across the developing world was actually undertaken in the internationally-funded CGIAR network of research institutions (including ICRISAT which is located in Hyderabad) that are now sadly in decline, in part due to international financial neglect.

Finally, this proposal makes sense because it is likely to do the least damage. If aid has no impact on growth at best and can seriously distort a nation’s economy at worst, is it not better to spend the money outside the country? Jagdish Bhagwati suggested as much in an Oped piece for the WSJ in 2005 (better formatted PDF here). Subramanian’s suggestion shows how that can happen in practice.

The need to finance public goods has never been greater. The technology gap between the rich and poor countries is expanding and that trend is only likely to accelerate as we move into a low-carbon economy. Countries with access to technology will reap the rewards of higher productivity, more adaptability, and a higher standard of living. Yet, those at the bottom of the scale will never form a viable market, and their needs will continue to be ignored. There is a strong case for the intervention of a relatively impartial international institution to both invest in the needs of developing countries and to coordinate their replication.

In the end, the success of this proposal will depend less on its actual value and more on the politics of aid. India wants to double the size of the World Bank, but it also wants a much bigger voice in its running. That can only happen at the expense of the Bank’s current masters. So the question is whether the world’s major donors will allow the World Bank to take on a new role, or by obstructing it will make the institution irrelevant?

Tags: arvind subramanian, bhagwati, development, Economics, Foreign Aid & Civil Society, global public goods, globalization, world bank