Barbara A. Upton: CONTINUED

Date: 05-03-2001

ISSUES:

The MDBs' Role

It is against this backdrop of substantial disagreement about their role and criticism of their performance that the MDBs are convening in their series of annual governing board meetings this spring. The following is a brief summary of the major current issues about the MDBs' role:

1. In light of the greatly increased willingness of private capital markets to provide funding to developing countries for a variety of purposes (especially if loans are guaranteed by country governments as they are for most MDB loans), should MDB funding for "creditworthy" countries by sharply reduced? This concern has been raised most strongly by a number of members of the U.S. Congress.

2. Should the MDBs continue to provide funding or loan guarantees for private sector projects or does this constitute unjustified "corporate welfare?" Concerns about this issue are raised both by NGOs worried about diversion of MDB funding from social projects and also by conservative critics on the grounds that MDB funding and guarantees serve to distort private capital markets.

3. Should the MDBs continue to provide funding for short-term balance of payments support to countries experiencing financial crises? A number of groups including a recent congressional advisory commission and a Council on Foreign Relations study concluded that the MDBs should not provide such funding since this is primarily a task entrusted to the International Monetary Fund. What about related programs such as "contingency credit lines" to facilitate or reduce the costs of developing countries' access to capital markets? Many large borrowers favor such programs while critics believe they subject the MDBs to potentially large financial risks and crowd out more developmentally useful programs.

4. Should there be a clearer division of labor among the five MDBs? Attempts have been made in recent years to clarify relationships among the MDBs and improve the synergy of their efforts, but critics believe there should be a much sharper division of labor especially between the World Bank and the regional banks. Others contend that specifying a clearer division between the roles of the World Bank and the regional institutions is difficult due to the different needs of each of the regions and differing capabilities of the four regional banks.

5. What should be the role of the MDBs in providing "global public goods," e.g., programs in environment, health, crime prevention? The MDBs have been increasingly pushed in this direction, although some would contend they lack capabilities in some of these areas, many of which have traditionally been the purview of various United Nations agencies.

6. What should be the relationship of the MDBs with respect to governments in borrowing countries? Especially, to what extent should the MDBs impose conditionality in exchange for loans? If the MDBs do impose conditions, should these be restricted to economic issues or issues in the sector receiving the loan, or should conditions regarding governance and human rights also be considered? A number of recent studies have shown that externally imposed conditions often do not produce lasting results. Some critics believe the MDBs should be far more selective and provide funding only to countries that have already adopted sensible economic policies. However, in some circumstances this would sharply curtail MDB lending. Are there cases where use of governance and economic conditionality could conflict, i.e., instances where adoption of an open, inclusive political process to debate issues results in choices on economic issues that pose problems for economic sustainability?

7. What should be the role of the MDBs in poverty reduction? Most of the MDBs now list reducing poverty as their overarching objective and have adopted much more ambitious programs to directly assist poor people. However, many social sector (health, nutrition, education, population) and social protection programs involve primarily local currency expenditures (e.g., salaries of teachers and health workers, income transfers) and will not generate convertible currency income for the borrowing country. Should borrowing countries that may already face debt problems take on foreign exchange debt (all MDB loans must be repaid in convertible currencies) for such programs? In addition, some countries with large poor populations (e.g., India, China) are only eligible for loans at nearly commercial interest rates, making this issue even more problematic. One response might be to provide soft term loans (or even grants) to more countries for poverty programs, but this could prove enormously expensive for donors and raise questions about whether the borrowing country could not and should not use its own resources for such programs.

Obstacles to Success

In addition to lack of agreement about their future role, the MDBs face additional obstacles. The functions for the institutions about which there is greatest agreement are much more difficult for them to perform successfully than the functions they undertook in their earlier years. Functions such as helping developing countries formulate legal and regulatory frameworks and strengthening local institutions to do such things as oversee electric utilities, define environmental priorities, or enforce banking laws often are technically difficult and call for highly specialized expertise. However, more problematic is the fact that these functions usually involve powerful local political interests and may call for changes in social and cultural patterns that are not easily or quickly modified.

Likewise, providing policy advice that is not only sound but also realistic in the context of local political and social conditions is not easy. Nor are judgements about whether planned reforms have been transparently considered by local civil society and are likely to be adhered to in the future.

In general the MDBs are now being asked to take on the toughest issues and achieve delicate balances among competing forces and objectives - functions that are often not done successfully in the more developed countries.

A second major area in which the MDBs face tough obstacles to success is in the area of poverty reduction. For decades the institutions have been headquarters-centered wholesalers of development finance far removed from the rural villages and urban slums where the poor of the developing world live. However, the MDBs are now being asked to get much more deeply involved in many aspects of poverty reduction. In countries where the borrowing government is motivated and capable of implementing such education, health, social safety net programs, the results may be successful. However, in the more frequent instances when local or national governments lack either the skill or the motivation to manage difficult programs over remote and disbursed areas, the MDBs face major challenges. Lacking a sizeable in-country staff of their own they must rely on consultants or local partner organizations - the competence and local relationships of which may not always be readily apparent. Expecting the MDBs to support social sector and poverty reduction programs whose success will be determined in remote areas and by a complex chain of actors is exposing the institutions to real risks of failed programs. In a number of cases the MDBs' risks have been compounded by lack of recognition on the part of MDB leadership or member governments that developing the infrastructure to manage and monitor poverty programs will involve significant costs in staff time and resources. If the MDBs are to continue their strong focus on direct poverty reduction programs much more attention needs to be devoted to implementing and monitoring modalities so that the gap may be bridged between fine-sounding theoretical programs and the realities of village life, where new programs may threaten entrenched power structures.

In summary, the role of the MDBs has changed considerably over the years. However, the institutions may face their most difficult evolution now as the conditions that gave rise to their creation have changed beyond recognition. Many issues remain outstanding about their future role, and the areas where there is most agreement present serious challenges for the institutions' traditional operating modalities.