Ben Chu: The IMF matters, but we should also pay attention to the World Bank
Economic Outlook: Staff at the Bank are under huge pressure to push money out of the door. The emphasis is on quantity rather than quality
Not many people noticed it, but last weekend's International Monetary Fund meeting in Washington DC was jointly hosted by the World Bank. The views of the IMF and its new managing director, Christine Lagarde, were widely reported. The IMF's warning of a sharp slowdown in global growth made headlines around the world, as did the alarm it sounded about the health of European banks. But the research of the World Bank flew pretty much under the global media radar. The words of the World Bank head, Robert Zoellick, were of wider interest only to the extent that they related to the economic crisis in the developed world. When it comes to these two children of the 1944 Bretton Woods conference, there is no doubt as to which is the more high-profile sibling.
There is a clear division of labour between the institutions these days. The IMF's job is to handle financial emergencies, providing assistance to governments that find themselves shut out by the global capital markets. The responsibility of the World Bank, on the other hand, is to plant the seeds that will flower into long-term growth, primarily in the poorer states of the world. One is the world economy's fire brigade, the other is more like a structural engineer. One rushes in, does the job and gets out. The other is supposedly there for the long haul.
Firefighting dominates the news at the moment, with the IMF's mission in Greece grabbing everyone's attention. A vigorous debate is raging over whether the savage austerity being imposed on Athens is curing or killing the Greek economy. Yet it is long-term development that drives the fundamentals of the global growth. Emerging and developing countries will provide the bulk of the 4 per cent global growth the that the IMF's latest World Economic Outlook forecasts for 2012.
While the advanced economies are expected to grow by just 1.9 per cent, on average, the developing nations are forecast to expand by around 6.1 per cent. India's forecast is 7.5 per cent, China's 9 per cent. Brazil and Mexico are expected to put on 3.6 per cent each. Middle and lower income countries are the planet's economic motor. If more poor nations, with their vast potential for expansion, could be plugged into the global economy, in the manner of China and India, the outlook for the world would be considerably less gloomy. More growth from developing nations could even help pull Europe and America out of their present stagnation.
And that is where the World Bank comes in: unlocking the potential of poor, dysfunctional, states. So how is it doing? Not particularly well is the answer. The organisation's prescriptions are often sound. The World Bank released a report at the meeting last week pushing for the legal empowerment of women across the developing world. It argued that equal access to resources for female farmers could increase agricultural output in developing countries by up to 4 per cent and that eliminating the barriers to women in the workplace could have a similarly dramatic effect in output. It is difficult to find fault with any of that.
Yet it is when it comes to the effectiveness of the Bank's lending programmes on the ground that its performance is often disappointing. In 2005, 78 donor countries met in Paris and pledged to make aid more effective. This was dubbed the Paris Declaration. But a report by the Organisation for Economic Co-operation and Development last month found that donors have only met one out of 15 targets set in Paris: hardly satisfactory progress after six years. The World Bank is generally considered to be one of the more effective donors, but the Bank's own watchdog reported this year that its performance has been mixed. And the Bank's healthcare projects in Africa have come in for some severe criticism. Between 1997 and 2008, less than a third of those evaluated were judged to have produced satisfactory outcomes.
So what's going wrong? People working in the development sector tell me that the problem is one of incentives at the Bank. Staff are under huge pressure to push money out of the door. Not much attention is given to monitoring and evaluating how the funds are actually spent. The emphasis is on quantity, rather than quality.
The Bank also tries to do too much. Rather than spending money on everything from health, to food security, to education, the World Bank should focus on areas in which it has a comparative advantage, such as infrastructure. That was, after all, how the Bank started out: funding the physical reconstruction of post-war Europe. The first recipient of World Bank aid was France.
The IMF gets a huge amount of public and media scrutiny. From the South Asian crisis of 1997 to Greece today, its prescriptions are intensely debated. And rightly so: decisions taken by IMF officials affect the living standards of hundreds of thousands of people. But the same is true of the World Bank and the decisions it takes about what projects to fund. There was a time, about a decade ago, when the World Bank was the focus of popular protests. But anti-globalisation activists now target the G20 rather than the Bank.
In a sense this is unfortunate. The organisation remains a huge player in the developing world. It was responsible for $43bn of new lending in 2011, which was spent on 303 different projects. As the chart above shows, its annual spend has been rising considerably in recent years. In some poorer economies, the sums the Bank lends could be transformative – if deployed effectively.
And what the Bank fails to do can be as significant as what it does. Over the past year, global food prices have spiked. Commodities such as wheat and corn are now at the same levels as seen during the food emergency of 2007-2008. World Bank research estimates that some 44 million people were pushed into extreme poverty by rising prices last year. Much of this rise appears to have been driven by financial speculation, rather than the fundamentals of supply and demand. But the World Bank has shied away from recommending measures to curb the activities of those trading in food commodity futures, preferring instead to explore means of helping states deal with price swings through hedging. Why doesn't Mr Zoellick throw his weight behind a campaign against food speculation, pushing for measures such as limits on position taking and for all contracts to be traded on transparent exchanges?
In the end, it is a matter of accountability. The World Bank should have a higher profile because it is an organisation in which our own governments – and by extension all of us – are shareholders. Britain has a particular responsibility here. In 2007 we overtook the US as the largest donor to the World Bank in absolute terms. That gives our Government the authority to push for reform. But to do that, the public needs to understand what the World Bank does and what its flaws are. It is time that we started scrutinising the work of the engineers of the world economy as closely as that of the firefighters.
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