Opportunity for reforms at World Bank

Source: The post is based on the article “Opportunity for reforms at World Bank” published in “Business Standard” on 21st March 2023. 

Syllabus: GS 2 – Important International institutions, agencies and fora- their structure, mandate. 

Relevance: Institute of global economic governance 

News: With Ajay Banga nominated to be the next World Bank president, there is great hope in his abilities to revamp this vital global institution. 

What are the issues with the functioning of the World Bank? 

Today, the world needs a global institution for global transformation towards a sustainable planet and promoting shared prosperity. The WB is largely missing in action in the climate fight.  

Instead, the WB is now seen as a multi-purpose development bank that tries to provide support to countries for their perceived needs. It does not have a broad strategic vision.  

It used to be a leader in thinking on economic development but has not been able to address these issues. 

WB is overly conservative and too risk-averse in the use of its capital base. It has not been able to leverage private capital flows for infrastructure and climate change. 

It has underutilised its guarantees and focused largely on loans. It has not financed insurance facilities as much as it could have.  

It’s also been criticised for being too slow. Bureaucratic procedures of the WB cause costly delays to its borrowers.  

Its country focus has improved performance but neglects its ability to meet global and regional financing needs.  

The WB and other regional banks now provide a small share of net flows to emerging markets. They have been overly conservative in their equity-to-loan ratios. 

What is the way forward to improve the functioning of the World Bank? 

It needs a substantial overhaul of its objectives and much more innovative use of its capital base and financial instruments. 

There is a need for actions on a much larger scale internationally for energy and ecological transformation for a more sustainable planet.  

Its new role should be as the global institution for climate change and sustainability. It must also be able to provide monitoring and advice on climate action in the entire world. These include a range of issues such as climate adaptation, mitigation, carbon pricing, environmental, social, and corporate governance and net-zero transformation.  

It is not sufficient to create a climate change department in the WB to continue with a business-as-usual approach. The entire organisation must be transformed to make it the premier global institution for dealing with climate change and shared prosperity. 

The WB must also shift the focus from lending to catalysing resource flows. It must help build the institutions and regulatory systems. These will help to draw in more capital from the private sector and from sovereign wealth funds.  

Its success must be judged how much resources it can catalyse to address social and physical infrastructure and climate finance needs.  

More innovative use of its financing instruments is needed especially in the way it books and uses guarantees and insurance backstops.  

The International Finance Corporation, is also a big player in private finance. It should spend much more effort on helping develop systems for SME finance, which can attract international capital.  

The WB must continue its country-based assistance and also focus more on global problems. The WB has huge power to address these issues by working in partnership with specialised agencies at the UN. It may need new and more innovative sources of financing for this purpose, including green bonds. 

The WB’s capital base must also be increased, and there must also be changes to the way it uses its capital.  

The emerging economies could also be allowed more leeway in the use of capital by changing their capital adequacy ratios without hurting their credit ratings.