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Foreign Affairs
Reforming the World Bank
Jessica Einhorn
Summary: The World Bank's outdated financial structure is a threat to its continued relevance. Paul Wolfowitz, the bank's new president, should begin closing the wing of the bank that lends to middle-income countries.
JESSICA EINHORN retired in 1998 as Managing Director of the World Bank after almost 20 years of service there. She is now Dean of SAIS, Johns Hopkins University.
CREATIVE DESTRUCTION
The World Bank entered a new era when Paul Wolfowitz took over as its president on June 1, 2005. Wolfowitz's predecessor, James Wolfensohn, had served in the role for ten years, with a mission of transformation and a management style that placed great emphasis on his personal leadership. By the time he left the post, Wolfensohn had succeeded in giving the bank "a human face" and "a dream of a world without poverty," and in altering the institution's priorities to emphasize building institutions, improving governance, enhancing the voice and participation of the poor, strengthening the rule of law, and stamping out corruption. When he replaced Wolfensohn, Wolfowitz was quick to emphasize that he embraced the bank's antipoverty mission. At the same time, he has let it be known that he will forgo a big-bang presidency.
The annual meetings of the International Monetary Fund and the World Bank take place in the fall, and, in a tradition begun by Robert McNamara in Nairobi in 1973, the president of the bank is expected to use that occasion to share his vision for the institution and unveil new initiatives. Wolfowitz's maiden speech, delivered at the annual meeting in Washington, D.C., in September 2005, was crafted to present himself as a president who will focus on the management of the institution, in cooperation with its partners, and look for leadership within countries themselves, with an emphasis on results and accountability.
The term "the World Bank" is shorthand for "the World Bank Group," which consists of several institutions. These include, most prominently, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), which provide credit to governments, and the International Finance Corporation (IFC), which works directly with the private sector. The IBRD's function is to provide loans at market-based rates to middle-income countries and better-off poor countries; IDA focuses on assisting development in the poorest countries in the world, with highly concessional financing. As the bank enters what may well be a ten-year period of leadership under Wolfowitz, it is necessary to ask whether changes to this structure are needed if the bank is going to continue to flourish. Most important is the question of how -- or if -- the IBRD can remain relevant to the needs of its middle-income clients and adapt its own financial structure to the modern world of global finance.
GROWING PAINS
During its over 60 years of existence, the World Bank has been a key part of the international institutional architecture. Along with the International Monetary Fund, it was established to promote an open and liberal international economy. Some of its greatest achievements, accordingly, have come from helping countries develop and grow through a liberalizing, outward-looking strategy. The bank's adversaries, meanwhile, are those who oppose the liberal trading system (this does not include those who argue that the liberal trading system could function better). On this issue, the bank simply cannot try to accommodate its critics.
Over time, the bank has evolved from an organization focused on growth through ...