World Bank’s Crisis Response Off Course
The World Bank’s response to the financial crisis five years ago was billed as critical to the world economy, but in India what it meant was sea turtles — thousands of them — hatched and released with the proceeds of a bank loan.
In Bangladesh, it meant an ill-fated effort to distribute millions of compact fluorescent light bulbs, ultimately canceled amid suspicion that suppliers had forged quality-control reports for the rapidly failing devices. In Argentina, it meant a road-building program delayed by alleged “procurement irregularities.”
When the World Bank meets this week in Washington, discussion will center on President Jim Yong Kim’s drive to overhaul an organization he feels has become preoccupied with small programs that aren’t delivering enough impact to the world’s poor. He has already fired top staff, demanded a reordering of lending priorities and framed his actions around an idealistic call to end extreme poverty.
A review of the bank’s crisis-driven lending spree in 2009 and 2010 shows why Kim may be concerned — and why development experts worry that an institution with billions at its fingertips is in danger of becoming an inconsequential footnote rather than a catalyst to help the world’s poor.
Bank lending more than doubled in 2009 and 2010, topping $100 billion, as officials approved an unprecedented 700 projects in more than 100 countries. But the organization — which touts itself as the world’s premier development agency — has struggled to deliver results. As much as a third of the money from those two years remains unspent as the bank copes with project delays, cost overruns and criticism that its crisis response focused on countries that needed it least.
Oversight arguably suffered in the rush to lend, part of what an internal audit group has documented as a decade-long decline in bank project performance. Giant power plants in Africa were approved with the weighty intent of wiring an electricity-starved continent, but have since fallen behind schedule; major loans propped up state-owned banks in India but demanded little in the way of reform, or supported Poland and other middle-income countries that were largely insulated from the effects of the crisis.
The Washington Post’s analysis of crisis-era lending included projects of a million dollars or more at the bank’s two main lending arms, the International Bank for Reconstruction and Development, and the International Development Association. The program documents examined included data as of June 30.
Kim, who served as president of Dartmouth College from 2009 to 2012 before being tapped by President Obama for the World Bank post, is starting to add detail to his plans. In recent days, he has said the bank needed to stop funding “small” programs, and pledged to boost loans and grants for war-ravaged or conflict states by 150 percent in coming years. He said he wants to break the near monopoly that regional desks have in the bank, so that the organization concentrates less on pumping out individual loans and more on ambitious, “transformational” endeavors.
Kim has hinted at a possibly profound shift at the bank away from a model that lends largely on the basis of what countries request, and which has evolved into a sort of all-things-to-all-people melange of programs.
If it takes hold, it would be a bold play to boost the bank’s influence.
Unlike a national foreign aid organization, the World Bank doesn’t give away money. Founded after World War II to help rebuild Europe, the bank uses its AAA bond rating to borrow funds which it then re-lends.
The terms are better than most nations can get on the open market and are highly concessional for the poorest countries.
Still, the bank needs to generate enough profit to pay its bills and add to the money available to lend.
As globalization has increased, the bank has been at risk of being sidelined. Its share of the capital flowing into developing nations has been dwarfed by both private money and the sometimes competing investments made by major nations such as China. In the effort to define what the bank does best and justify their place in the world, bank leaders often point to their depth of experience in pulling off difficult infrastructure or government reform projects under tough conditions — rugged local geography, civil and armed conflict, political upheaval or opposition from local activist groups and citizens.
The bank’s response to the crisis, coupled with other recent data, shows the limits of that claim — and highlights why Kim is hunting for ways to get involved in bigger deals that make more impact, spark more private investment and put the bank back at the center of the discussion. Behind his strategy is a sense that the organization has drifted, with lending programs that have strayed from the core mission of fighting poverty, and a bureaucracy that, in his words, has become “concretized.”
Kyle Peters, the bank’s vice president for operations policy, said the crisis did require fast action of a sort that would make any institution let down its guard — and which led governments around the world to take extraordinary steps. The urgent aim at the time, he said, was to build confidence in an economic rebound. But he also acknowledged the problems that followed on.
“We ramped up very quickly in a flat budget environment, and we were highly responsive to our clients,” Peters said. “The fact that we have some things off-track — we did some things fast, yes. And it is right that we go back and look at these loans and see where we have problems.”
In some cases, he said the bank purposely decided not to burden loans with too many restrictions for fear that it would slow disbursement or drive away potential borrowers — a lesson learned during the Asian crisis in the late 1990s.
“When you are in a crisis you need to deal with the crisis,” Peters said. “It is not the time to pile on. When the house is burning it is not the time for me to tell you that the toilet on the third floor isn’t working.”
Even critics of the bank’s crisis response acknowledge the difficult choices that had to be made as the world economy froze. The bank’s Independent Evaluation Group credits it with helping countries such as Turkey stave off deeper problems.
However, “it was eyes wide open at the time that they were potentially setting up some problems at the project level,” said Scott Morris, a former U.S. Treasury official who served as a liaison to the World Bank at the time. He is currently a fellow at the Center for Global Development.
“There was an imperative to get money into the system. The global problem was so overwhelming. It was important for senior U.S. officials and other countries to point to a big number, to show that in addition to what they were doing domestically, there was a global architecture in place that was responding.”
According to the evaluation group, the World Bank often missed the mark in its lending. An evaluation group study of bank actions during the crisis found a “low correlation” between the loans given with the actual needs of different countries.
Among the biggest World Bank borrowers during the crisis years, countries such as Mexico and Poland had far more extensive credit lines available from the International Monetary Fund but never needed to use them. Poland, in particular, was being praised by the IMF at the time as “resilient” to the crisis.
Billions of dollars were pumped into state-owned banks in India, another country relatively insulated from the world’s broader problems. Those loans, opposed by the United States, carried few requirements that it reform its banking system.
“The worst global financial crisis in a generation was not the occasion on which to launch complex structural reforms,” bank officials wrote.
The downward trend in performance has become a top-level concern. A recent evaluation group study found that bank performance on investment projects — the road, water, school or other discrete efforts typically associated with the organization — has been declining since the early 2000s.
For overall country programs, only 59 percent were considered moderately satisfactory or better. The bank’s internal guidelines say that 70 percent of countries should achieve that rating or above.
The institution’s largest ever single loan, $3.75 billion, went to fund a massive coal-fired power plant in South Africa that is now years behind schedule, amid rising concern about its environmental impact. Construction of a large power plant in Botswana was suspended after a third on-site fatality.
A bank field report for the Botswana plant spells out the breadth of problems that project faces: “The risks to … fully achieving its stated objectives are real as indicated by a number of accidents at the site; technical setbacks with the completed power generation units; the absence of arrangements for operation and maintenance; and further delays in the already significantly extended completion schedule.”
More than 10 percent of the bank’s total lending during the crisis, some $12 billon, went to “additional financing” of existing projects — money that in some cases made up for problems caused by earlier delays and cost overruns.
The cost overruns included a jump from $40 to $120 per person to build water systems for small towns in Ghana, from the start of the project in 2004 through its extension beyond 2009; a jump from $35 to $90 per person in the cost of extending sewer connections in Vietnam; and a doubling in the cost of a road project in Thailand delayed by allegations of corruption, a procurement where no bidders showed up, and a flood that washed out already completed work.
In interviews, evaluation group officials said the performance decline should be kept in context. They said the bank, for example, was taking on more difficult projects.
If Kim has his way, there will be more oversight from the beginning, more involvement from technical experts and less autonomy among regional staff. Most of all, there will be more effort to coordinate the bank’s work at a global level so that it does more for the poor.
“The regions don’t work together. The technical areas don’t work with the regions. Our self-analysis said there are too many silos,” Kim said after an October speech at George Washington University. “Every region made their own plan for the year, and they were kind of left alone. Now, we are going to have a discussion.”