The World Bank and Governance

A Decade of Reform and Reaction

Diane L. Stone, Christopher Wright

• Publisher: Taylor & Francis
• Year: 2006
• Print ISBN: 9780415416504
• eBook ISBN: 9781134125470
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

This timely book offers the first critical examination of World Bank policy reforms and initiatives during the past decade.

The World Bank is viewed as one of the most powerful international organizations of our time. The authors critically analyze the influence of the institution's policy and engagement during the past decade in a variety of issue areas, including human rights, domestic reform, and the environment.

The World Bank and Governance delves into the bowels of the World Bank, exploring its organizational structure, professional culture and bureaucratic procedures, illustrating how these shape its engagement with an increasingly complex, diverse and challenging operational environment. The book includes chapters on two under-researched divisions of the World Bank: the International Finance Corporation and the Multilateral Investment Guarantee Agency. Several illuminating country studies are also included, analyzing the World Bank's activities in Argentina, Bolivia, Lebanon, Hungary and Vietnam.

This volume will be of great interest to students and scholars of international relations, development, politics and economics.

1 Introduction

The currency of change: World Bank lending and learning in the Wolfensohn era

Diane Stone and Christopher Wright

The World Bank Group is at a critical juncture in its history. The departure of James Wolfensohn as president in mid-2005 and the appointment of Paul Wolfowitz marked a milestone in the Group’s history. This transition represents an ideal opportunity to reflect on the legacy of the initiatives and reforms undertaken during the previous decade that continue to direct many existing trajectories in development policy.

James Wolfensohn’s ten-year tenure as president of the World Bank was a period where the organization was under the increasingly intense scrutiny of the international community. The decade saw ‘radical changes’ in thinking about development policy, in which the ideas and policy prescriptions from the 1980s were being increasingly questioned (Gilbert and Vines 2000). This was not only due to greater pressures from dominant shareholders and a growing array of stakeholders, it was also a time of internal institutional soul searching with the reforms and evaluations that responded to and reflected the implacable problems of ameliorating poverty and generating growth and development.

As an organization, the World Bank met with some dramatic changes and has become a more open actor (Miller-Adams 1999). This has meant that the Bank is increasingly becoming a forum for conflicting ideas and sources of knowledge to confront each other, which has increased scrutiny of the Bank’s own development policy prescriptions. The challenge is to understand how, if at all, this has affected the nature of policy change at the Bank, in terms of introducing new factors that drive or hinder organizational change.

The contributors to this volume reveal a variety of explanations for policy reform or continuity in different areas of the Bank’s work. For example, the continuity of certain policy prescriptions and types of interventions is explained by some as a function of the Bank’s professional culture and persistent ideological bias. Meanwhile, the emergence of new policies or amendments to existing ones is attributed by others to organizational learning or the work of internal policy entrepreneurs, or as a strategic desire within the Bank’s management to enhance its organizational legitimacy with dominant shareholders, civil society groups and clients. governments and both public and private sector recipients in developing countries has a significant discursive dimension (see Barnett and Finnemore 1999; Bøa˚s and McNeill 2004).

This introduction is structured into three parts. In the first section, we consider the aspects of the Bank’s mandate, mission and activities that have arguably made it the most influential development organization in the world. In doing so, we address the sources of its financial and discursive power, and consider how new policy frameworks introduced in the last decade have augmented, yet transformed, the Bank’s influence in developing countries. In the second section, we describe the knowledge-production and knowledge-sharing practices of the Bank, one of the most significant aspects of the Bank’s emerging policy agenda. In the third section, we address the nature of conducting research on the World Bank, and discuss the advantages of getting inside the ‘black box’ of the Bank, while outlining the themes and structure of the book.

A decade of changing fortunes

Established in 1945 after the Bretton Woods meeting (along with its ‘sister institution’ the International Monetary Fund – IMF), the World Bank Group is an intergovernmental organization whose primary function is to provide financial assistance to developing countries. Since its inception, it has gradually grown into a multi-pronged development institution comprised of four organizations that collectively provide financial assistance, risk guarantees, technical assistance and policy advice to both governments and the private sector in developing countries. The International Bank for Reconstruction and Development (IBRD) provides medium-term loans at a marked-up rate that ensures profitability. In contrast, the International Development Association (IDA), established in 1960, provides long-term loans at concessional rates meant to cater to poorer countries with very limited access to private capital. The International Finance Corporation (IFC), created in 1956, provides financing to the private sector without government guarantees, whereas the Multilateral Investment Guarantee Agency (MIGA) offers political and non-financial risk guarantees to private investors.

Today, the World Bank Group represents an organization with over 10,000 employees, managing significant resources as a financial and knowledge intermediary between powerful shareholders and both public and private sector recipients in developing countries. Consequently, it has become one of the most powerful institutions in the global political economy. It is powerful for reasons that are now well documented.

First, its lending power far exceeds that of other financial institutions and cannot be deduced from the volume of paid-in capital alone. While its lending to developing countries is less than that of commercial banks, the Bank enjoys greater leverage and influence by virtue of its superior credit rating and close relationship with governments. Additionally, and in contrast to commercial banks, its financing is deeply embedded in an economic development agenda driven in part by the Bank’s own research department. This means its role as a financial intermediary between powerful shareholder governments and both public and private sector recipients in developing countries has a significant discursive dimension (see Barnett and Finnemore 1999; Bøa˚s and McNeill 2004).

Second, mission creep has long been a feature of the Bank, and has continued during the Wolfensohn era (see Einhorn 2001; Ascher 1983). Its original purpose – to aid the reconstruction of post-war Europe – soon shifted in the advent of decolonization to fostering economic development in developing countries. During this stage, Bank funds were often channelled through public development agencies in support of large-scale physical infrastructure projects, reflecting a development model that placed the state at the centre of economic growth. With the rise of neo-liberalism in the 1970s, the Bank came to increasingly favour a private-sector-driven development model that sought to avoid the corruption and political favouritism that had mired much of its previous lending through public development agencies. In addition, it attributed soaring sovereign debt in some of its borrower countries to overextended government that limited private enterprise and capital. The structural adjustment policies that were imposed to roll back the state in the 1980s were driven by an understanding of development that regarded public ownership and regulation as an impediment to economic growth.

Popularized as the Washington Consensus policies, this development agenda was in turmoil as Wolfensohn assumed his presidency. The ‘Consensus’ was increasingly criticized for its unwavering faith in free market principles and its reliance on financing conditionalities for pushing through economic and political reform programmes that proved to inflict adverse consequences on the poor and the environment. In its place, a more holistic development model emerged, in part driven by the Bank’s own research on the role of institutions in economic development, that increasingly recognized the human, social and environmental dimensions of economic growth. Accordingly, its current mission and expertise go well beyond the narrow confines of economic development, as it has evolved into ‘the institution of choice for working with developing countries on global commons issues such as the environment and health’ (Einhorn 2006: 19).

Third, during the course of its history, its power to persuade has, of course, not been unrelated to its ability to impose conditions on the use of its funds. During the 1970s, the introduction of policy-based lending was meant to create a favourable policy environment for economic growth. This financing modality expanded its influence by the use of policy conditionalities, in which financing depended on the implementation of particular economic reform programmes. The use of this tool broadened with structural adjustment lending in the 1980s, when Bank and IMF interventions converged around the Washington Consensus policies and pushed for deregulation, privatization and the liberalization of capital markets in developing countries.

The effectiveness and legitimacy of policy conditionality was increasingly being questioned, and has been the source of considerable interest to the Bank and external observers alike (see Gilbert and Vines 2000: 24–9; World governments and both public and private sector recipients in developing countries has a significant discursive dimension (see Barnett and Finnemore 1999; Bøa˚s and McNeill 2004).

Second, mission creep has long been a feature of the Bank, and has continued during the Wolfensohn era (see Einhorn 2001; Ascher 1983). Its original purpose–to aid the reconstruction of post-war Europe–soon shifted in the advent of decolonization to fostering economic development in developing countries. During this stage, Bank funds were often channelled through public development agencies in support of large-scale physical infrastructure projects, reflecting a development model that placed the state at the centre of economic growth. With the rise of neo-liberalism in the 1970s, the Bank came to increasingly favour a private-sector-driven development model that sought to avoid the corruption and political favouritism that had mired much of its previous lending through public development agencies. In addition, it attributed soaring sovereign debt in some of its borrower countries to overextended government that limited private enterprise and capital. The structural adjustment policies that were imposed to roll back the state in the 1980s were driven by an understanding of development that regarded public ownership and regulation as an impediment to economic growth.

Popularized as the Washington Consensus policies, this development agenda was in turmoil as Wolfensohn assumed his presidency. The ‘Consensus’ was increasingly criticized for its unwavering faith in free market principles and its reliance on financing conditionalities for pushing through economic and political reform programmes that proved to inflict adverse consequences on the poor and the environment. In its place, a more holistic development model emerged, in part driven by the Bank’s own research on the role of institutions in economic development, that increasingly recognized the human, social and environmental dimensions of economic growth. Accordingly, its current mission and expertise go well beyond the narrow confines of economic development, as it has evolved into ‘the institution of choice for working with developing countries on global commons issues such as the environment and health’ (Einhorn 2006: 19).

Third, during the course of its history, its power to persuade has, of course, not been unrelated to its ability to impose conditions on the use of its funds. During the 1970s, the introduction of policy-based lending was meant to create a favourable policy environment for economic growth. This financing modality expanded its influence by the use of policy conditionalities, in which financing depended on the implementation of particular economic reform programmes. The use of this tool broadened with structural adjustment lending in the 1980s, when Bank and IMF interventions converged around the Washington Consensus policies and pushed for deregulation, privatization and the liberalization of capital markets in developing countries.

The effectiveness and legitimacy of policy conditionality was increasingly being questioned, and has been the source of considerable interest to the Bank and external observers alike (see Gilbert and Vines 2000: 24–9; World Bank 1998). Since then, while legally binding conditions have been gradually declining in Bank lending, the Bank’s influence and agenda-setting capabilities have arguably expanded, primarily by the emergence of various development assistance mechanisms that have reinforced its position as the world’s foremost development institution.

Fourth, with recent advances in information technology and communication, the volume of knowledge that is of and about the World Bank, and the public access to this, has significantly increased. Indeed, the production and diffusion of knowledge has become an explicit objective of the World Bank Group in the last decade, and has been promoted by various external sources as the Bank’s real comparative advantage (see Gilbert and Vines 2000; IFIAC 2000).

Fifth, the power of the World Bank has frequently been attributed to its governance structure, and, in particular, the dominant position of the United States. To understand its institutional behaviour, this literature focuses on the Bank’s formal governance model: the Bank’s president is commonly a US citizen and directly appointed by its government. The voting power of shareholder governments is proportionate to their paid-in capital, providing the USA with an effective veto.

Analysis of the implications of this governance structure varies. Some see it as evidence that the Bank functions as a tool of US imperialism (see Kapur 2003: 6; Wade 1990, 2002). These studies point to the propensity of the Bank to favour strategic priorities, policy interventions and financing practices that conform to US geopolitical and economic interests in developing countries. In these cases, the neo-liberal policy framework promoted by the Bank, in particular its policy or regulatory reform programmes, is seen as a manifestation of US hegemonic power.

Others have suggested this governance structure simply explains changes in the Bank’s institutional behaviour. In particular, Nielson and Tierney (2003, 2005) drew on the principal-agent theory of institutional change. They argued that the timing and scale of environmental reforms at the Bank can be explained by principal control over an agent, where the USA had threatened to withhold replenishment funds from the Bank unless its demands for environmental reforms were met. In turn, they analysed the environmental dimension of the Bank’s lending activities and argued that, generally, its environmental projects portfolio expanded following periods of environmental reform. However, these conclusions, and those of similar agency-centred studies analysing institutional change in international organizations, have been contested by others (see Barnett and Finnemore 1999; Gutner 2005; Park, this volume, Chapter 9).

The legitimacy deficit

As with many of his predecessors, Wolfensohn sought to put his mark on the Bank’s activities early on. Shrugging off internal scepticism, he called for development planning to be transparent and accountable, void of corruption, and driven by the needs of borrower countries (Mallaby 2005). His ideas would be encapsulated in the Comprehensive Development Framework (CDF), the major new policy initiative during his tenure (see Gulrajani, this volume, Chapter 3). Subsequently, the framework would provide the foundation for the poverty reduction strategy papers (PRSPs) which the Bank produced in collaboration with low-income countries (see Tan, this volume, Chapter 8). Meant to break with the heavy-handedness of the Bank’s interventions in the past, the PRSPs were introduced as a means to ensure country ownership and put borrowers in the position of deciding upon a policy mix that best meets their own economic and political objectives (see Hatcher, this volume, Chapter 10). In many cases, these have become guiding documents for multilateral and bilateral aid programmes and projects, multiplying the effect of the Bank’s policy prescriptions. Notwithstanding these new policy initiatives, unsurprisingly, the Bank has faced a welter of criticism from the sources outlined below.

US influence

The United States, its principal shareholder, continued to put pressure on the Bank to reform itself. While previous calls for reform focused on changes to operational policies that could enhance the Bank’s accountability, the development outcome of its programmes and projects and its relationship with civil society, policy recommendations emanating from the legislature of its most powerful shareholder considered much more draconian measures. Specifically, in the aftermath of the Asian financial crisis, the US Congress established a commission to review the role and effectiveness of international financial institutions as part of authorizing legislation to grant additional funding to the International Monetary Fund. Released in March 2000, the Meltzer Report, named after its principal author, called for broad changes to multilateral development assistance and made damning remarks regarding the Bank’s effectiveness at reducing poverty in developing countries (IFIAC 2000). Among its most radical suggestions, and one that has since been repeated by critics on both the left and the right, was a recommendation to phase out lending to middle-income countries in favour of concessional financing to the poorest countries (see also Einhorn 2006; Rich 2002). In these countries, development needs are most dire and access to private capital is particularly limited As for the IFC and other development banks targeting the private sector, it was recommended that they abolish their financing practices altogether, and instead focus their complete attention on providing technical assistance and disseminating best practices.

While these policy positions were not entirely shared by the US Treasury, they nevertheless underscored the major reservations towards the need for multilateral financing in developing countries that national legislators were developing as a result of the major transformations in the global economic and financial system in the 1990s. While the IFC and the IBRD survived the political assault, this experience made them increasingly aware of the need to demonstrate their relevance and achievements to shareholders and stakeholders alike.

Less developed country influence

The influence of developing country governments on the Bank, as both shareholders and loan recipients, has also been transformed in recent years. A particularly noticeable trend is the growing gap among developing countries in the power and influence they can exert over the Bank’s programmes and projects. The highly uneven growth of transnational private capital flows in the early 1990s significantly strengthened the bargaining position of a few large middle-income countries relative to the Bank, as they became less dependent on Bank funds for undertaking major development projects. This posed a problem for the Bank, as lending large volumes to these countries is critical to the Bank’s profitability.

Increasing the attractiveness of Bank loans in more competitive markets where borrowers have access to multiple sources of long-term financing has therefore become an important imperative for the Bank. For example, the reforms associated with the Strategic Compact in 1996 gave country directors more decision-making autonomy and control of the Bank’s budget, and were part of an overall trend to tailor development assistance to countryspecific circumstances.

For developing countries that have yet to benefit significantly from financial globalization, the Bank and other multilateral lenders still represent the only source of long-term financing. In these cases, the Bank exerts more influence on economic development by being able to make funds available only for specific purposes under certain conditions. In recent years, the Bank has looked for commitments to ‘good governance’ as cr...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Tables
• Contributors
• Preface
• Acknowledgements
• Abbreviations
• 1 Introduction: The Currency of Change: World Bank Lending and Learning in the Wolfensohn Era
• Part I: Policy Change Inside ‘the Black Box’
• Part II: Confronting the Outside