Escape from the World Bank

PHILADELPHIA – The elephants in the room at the annual International Monetary Fund/World Bank meeting in Lima, Peru, were the China-inspired Asian Infrastructure Investment Bank (AIIB) and New Development Bank (or “BRICS Development Bank,” as it was originally called). Will these new institutions behave like the World Bank or the more conventionally “bank-like” European Investment Bank (EIB)? Above all, will they be vehicles to promote – or, paradoxically, constrain – China’s interests?

The reality is that over the next decade, these new institutions will not be huge lenders. The paid-in capital of each is $10 billion; so, even with an equity-to-loan ratio of 20% (the current floor for the World Bank), each will be able to lend only about $50 billion over the next decade – not chump change, but hardly a game changer – unless they “crowd in” substantial private investment. What matters is that the larger emerging markets are putting substantial capital into institutions that will be dominated by China – an indication of how frustrated they are with the World Bank and the IMF.

The World Bank is like an old ship: in its seven decades, all kinds of barnacles – sticky budgetary accretions and transaction costs – have accumulated on its hull, steadily impeding its speed and performance. In the 2015 financial year, the EIB lent more than twice the amount provided by the Bank, but with one-sixth the staff. Whether measured by flows (loan disbursements) or stock (loans outstanding), the World Bank is massively over-staffed, with a much higher administrative budget than the EIB.

When the Bank was formed, the key governance mechanism was a resident Board of Directors that reported to a Board of Governors – usually finance ministers or equivalent senior authorities from member countries. Over time, new offices proliferated: an Office of Internal Audit, an Independent Evaluation Office, an Inspection Panel, a Chief Ethics Officer, and an Office of Institutional Integrity.