World Bank: Stress test

Shawn Donnan

Financial Times, April 16, 2015.

http://www.ft.com/intl/cms/s/0/54fba5c4-e2d6-11e4-aa1d-
00144feab7de.html#axzz3xdhlA6Eq

Facing increasing competition and beset by

criticism, what next for the institution?

I n the muddy waters of the Congo, where the river speeds

into what are known as the Inga Rapids, sits what some see
as the future of electricity in Africa, and, quite possibly, the
World Bank as well.

Jim Yong Kim, the banks president, certainly thinks so.

Despite US concerns, the World Banks board last year
approved a $73m project to help authorities in the
Democratic Republic of Congo conduct environmental and
other feasibility studies and re-energise decades-old plans
for what would be the worlds largest hydroelectric complex.

The move is a bold attempt at getting back into the mega

projects game the bank was once renowned for and giving
new impetus to a long-dormant project. Were it actually to
be completed one day, the Grand Inga complex would
certainly be mega and one of the banks biggest ever projects,
costing at least $50bn, comprising eight dams and
generating 40,000MW of power, or half what Africa
produces now and twice the output of Chinas Three Gorges
Dam.

Beyond that, says Mr Kim, it would stand as a sign of the

World Banks unique power to make big and vital
infrastructure projects viable, or bankable, for investors
and to do so in complicated environments such as the DRC.
The first stage is to deliver a single new dam worth some
$12bn, a fraction of which would be financed by the bank.
This is a classic example of a project that would never
happen without the involvement of groups like us, he said
on the eve of this weeks spring meetings of the World Bank
and International Monetary Fund. It is a project that I really
want to get started. Such intent matters more now than ever
before.

Founded 70 years ago alongside the IMF in the closing days

of the second world war, the World Bank now has 188
members and remains a central force in global development.
It doled out more than $65bn in loans, grants and other
commitments last year to developing countries, with more
than 12,000 staff and almost 5,000 consultants in 131
countries working on everything from education to climate
change and health policy to bridges and dams.

The new reality

But history and the shifting power in the global economy are
catching up. For decades the bank has weathered criticism
from anti-globalisation campaigners and environmental
groups, many of which have seen it as an instrument of US
power, but its current dilemma is more profound. With
China and other emerging economies pushing new
alternatives to existing multilateral institutions, there seems
to be little question that the way the global economy is
governed is undergoing its biggest change since the World
Bank and the IMF were established at Bretton Woods.

Even as the US has mounted its own ineffectual diplomatic

pushback against the Beijing-backed Asian Infrastructure
Investment Bank, the reality is that the very institutions that
Washington is seeking to defend are already trying to adapt
to the new reality.
While the US has lobbied allies not to join the AIIB, both Mr
Kim and Christine Lagarde, managing director of the IMF,
have publicly embraced the new institution.
They may not have any choice. Ms Lagarde now speaks of the
need for a new multilateralism that embraces emerging
players such as the AIIB as a way to band together and boost
lagging global growth. She has also grown hoarse urging a
Republican-controlled US Congress to ratify 2010 reforms
that gave China and other emerging economies greater
representation at the IMF, where the US retains a veto.
Mr Kim last week vowed to do everything in his power to
find innovative ways to work with the AIIB, adding that as
the search for successors to the UN-sponsored millennium
development goals continues theres more than enough
work to go around.
He denies that his stand puts him at odds with the White
House that appointed him in 2012. Indeed, US officials have
said that they would like to see the AIIB work with existing
multilateral institutions once it begins lending and have
reserved their grumbling about allies joining for anonymous
utterances.
The World Bank president is also clear, however, that he
believes he has a more nuanced understanding of what a
future of co-operation looks like than some in the US
administration. I dont think Jack Lew [the US Treasury
secretary] and I are saying anything different about the Asian
Infrastructure Investment Bank, he says. I just have a lot
more very fine-grained feel for how it is going to work, for
how our collaboration is going to work, because I do this
every day.
Its not all about the money

His vision for the survival of the World Bank rests largely on
a hybrid future built around loans that come with vast
pools of knowledge.
The former immunologist points to the fact that both China
and India have in recent years increased their borrowing
from the World Bank not because they need the money but
because, he argues, they want its expertise.
There is no such thing as breaking the international order,
Li Keqiang, Chinas premier, told the Financial Times in a
recent interview. We gained advanced experience from
working with the World Bank and other
institutions...China has been a beneficiary of the current
international system.
Mr Kim accepts that to deliver that expertise better the bank
needs to be more nimble, especially as it faces rising and
inevitable competition.
Its not just the AIIB. But its the bond markets. People can
go directly to the bond markets now and raise funds ...Why
are we trying to get faster from conception to delivery? Its
because theres competition out there. Why are we trying to
get better at the movement of knowledge? Because countries
have options. Thats just a fact.
We were the biggest people on the block [and] by far the
biggest lender to these poor countries, he says. They did
not have any other sources and you know we could basically
call the shots. [But] as everyone in the world has pointed out,
we are not there any more.

Few doubt the bank is in need of change. David Dollar, a

former US Treasury official who spent 20 years at the bank,
says it has long had a plodding bureaucracy that at times has
caused some borrowing nations to shy away.
He cites an Indian official who once told him: Mr Dollar, the
combination of our bureaucracy and your bureaucracy is
deadly.
Still Mr Dollar who once ran the banks China operation
worries that the Kim reforms may end up centralising its
operations and expertise and make it too focused on
technocratic solutions rather than putting experts in the
field. That is not how development works in practice, he
says.
Some bank watchers also question whether Mr Kim, who was
considered a progressive when he arrived and has been vocal
on issues like inequality, is returning the institution to what
they see as its bad old ways. Lobby groups remain critical
of its resettlement policies and its slow updates to
environmental safeguards . They also worry that the
competition from the likes of the AIIB is prompting it to
return to its old model of backing growth and massive
infrastructure projects.
Nicolas Mombrial, who tracks the World Bank for the aid
agency Oxfam, says there are increasing glimpses of the old
World Bank. He adds: I think they are going the wrong way
and that they may crash if they go there.
Mr Kims efforts at transformation have not always been
welcomed by bank staff. A now two-year-old reorganisation
of the bank into global practices designed to better
organise its expertise has been controversial and drew a
vocal staff revolt last year.
None of that staff anger has been apparent around this
weeks spring meetings but some of his ideas and methods
continue to draw rolls of the eyes from bank insiders. The
president is an evangelist for open plan offices and has
moved his desk from a traditional office suite into a towering
double-height hall in the banks Washington headquarters.
But most World Bank staff, including senior executives,
continue to work out of the rabbit warren-like offices that
have long been the norm, and say they prefer it that way.

Growing dissent

Some senior staff complain that in his effort to create global

practices filled with experts he has driven away some world-
class talents. There are also those such as Scott Morris, a
former US Treasury official who oversaw Washingtons
relations with the bank in the first Obama administration,
who argue that the reorganisation has masked the need for
more radical change.
Well before the AIIB was conceived, he says, the bank was
losing market share in the world of development finance to
regional competitors such as the Asian and African
development banks. After a round of capital increases in
2010, Mr Morris and a colleague at the Center for Global
Development wrote in a paper last month, the World Banks
share of the capital held by all multilateral development
banks fell from 50 per cent to 39 per cent.
At the same time the private sector is playing a growing role.
Foreign direct investment into emerging markets has been
rising rapidly. In 2014 the Paris-based OECD found that FDI
from its largely wealthy member countries into developing
economies was worth 1.7 times the flow of official
development assistance, including that from the World
Bank. These new dynamics, Mr Morris says, mean that the
bank should be moving out of its traditional lending function
and focusing more on deploying expertise, or as a hub for
discussions on big issues such as climate change.
[The World Bank] is losing salience if it sticks with that core
model and doesnt go in another direction, he says.
Mr Kim disputes that. He argues that the banks competitive
advantage comes from the unique link between its lending
function and its expertise. But not all of its shareholders
agree with those lending imperatives.
Last years board decision to back the $74m funding to help
revive the Grand Inga project in the DRC came with an
important abstention: that of the US, which raised questions
about key elements of the scheme.
Notwithstanding the projects potential, there are
significant governance and environmental risks that need to
be effectively managed for such a large, complex project to
succeed, the US Treasury said in explaining its vote.
Whether the Congolese project will ever come to fruition
remains an open question. By some accounts, damming the
Inga Rapids was first floated as an idea almost a century ago.
Two dams were built in the 1970s and 1980s but they are
now in poor repair and operating well below their capacity.
If the World Bank wants to avoid a similar fate and survive
the onslaught of new competitors it will have to hope for a
better future than that.