“The World Bank must reform- Overhauls to multilateral development banks could be a lasting legacy of India’s G20 presidency”

Source: The post is based on the article “The World Bank must reform- Overhauls to multilateral development banks could be a lasting legacy of India’s G20 presidency” published in “ Business Standard” on 22nd August 2023.

Syllabus: GS2- Important International institutions.

News: In this article, author discusses the need for reforms in the World Bank Group (WBG) to better support low and middle-income countries, enhance its role as a knowledge provider, and improve its advisory services.

What are the major roles of the WBG?

Financier: Provides loans to low and middle-income countries. Like, assisting countries with developmental needs.

Knowledge Bank: Produces and shares information and research. Like, publishing the “Doing Business index”.

Trusted Advisor: Offers policy advice based on global best practices. Such as, sharing cross-country experiences to aid policy decisions in developing countries.

Why is there a need for reforms in the WBG?

The need for reforms in the WBG arises due to:

Debt Distress in LICs: Despite owing half their external debt to MDBs, low-income countries (LICs) are considered in debt distress. Like, questions arise about the accuracy of debt sustainability assessments by multilateral development banks (MDBs).

Incentive Structure Issues: There’s a potential conflict of interest, where WBG staff are rewarded for new lending, possibly leading to biased debt sustainability assessments.

Volatile Support for MICs: Middle-income countries (MICs), while having market access, are susceptible to rapid changes in capital flows. For instances, MICs often experience capital flow reversals due to global sentiment shifts.

Knowledge Impact: Despite allocating a significant budget to knowledge dissemination, its impact has been limited. For example, While WBG releases multiple growth forecasts for India, it doesn’t significantly address India’s low female labor force participation or its lagging manufacturing sector.

Lack of Local Engagement: WBG’s current advisory model lacks intense local engagement and updated country-specific knowledge.

Redundancy: The WBG often duplicates efforts that other institutions, like the IMF, already handle. Like, multiple growth forecasts for India with no superior accuracy.

Operational Mode: The WBG has remained in remote mode post-pandemic, unlike its client countries, affecting its efficiency and relevance.

What should be done?

Enhance Financial Support:

For LICs, the WBG should focus on building resilience and state capacity. Addressing LICs’ debt distress through comprehensive assessments, factoring in challenges like climate risks, is vital.

For MICs, the introduction of financial tools such as guarantees or swap lines can stabilize their economies, given MICs’ susceptibility to capital reversals from global shifts.

Revamp Knowledge Delivery:

An independent review of the WBG’s knowledge outputs, like the often-criticized “Doing Business index,” is necessary. Additionally, the WBG should ensure its reports are more accessible and aligned with pressing issues, such as key challenges faced by countries like India.

Improve Advisory Services:

The WBG needs to incorporate international expertise into its advisory services, offering member nations informed policy advice. Simultaneously, collaborating with local institutions will provide value while optimizing resource use.

Adjust Operational Model:

Mirroring its client nations, a return to in-person operations by the WBG is crucial. This would boost engagement and responsiveness across its various offices, including places like New Delhi.