For decades, the World Bank stood alone in terms of size and influence in emerging market around the world— this is no longer the case. The world has changed considerably since the Bank first began to focus its lending and expertise on the developing world some 50 years ago. In the 1960’s, global capital markets were almost non-existent and all types of international financial flows were tiny by today’s standards. Today, global financial markets, private business, and emerging donors all offer capital and expertise for developing countries. The room is getting crowded, and traditional development banks no longer carry the largest check book.
The rise of China as a global donor and investor serves as a powerful illustration of the changed landscape the World Bank and other similar organizations now occupy: according to McKinsey & Company, while the total level of loans outstanding from the world’s five biggest multilateral development banks stood at $500 billion in 2013, total Chinese outstanding foreign loans and deposits were a staggering $838 billion at the end of 2011. Foreign direct investment totaled $1.45 trillion in 2013, with $778 billion of that total heading to developing countries. Add to this that dozens of developing countries now have investment grade credit ratings, and therefore access to global capital markets. Clearly organizations like the World Bank which previously were juggernauts in an empty playing field are now minority shareholders in a system that is much larger than them.
How, then, should institutions established 50 and 60 years ago evolve to stay relevant when the world has undergone such radical changes? Outdated assumptions that, for example, all donors will strictly adhere to World Bank standards will have to be re-evaluated. The problem here is best framed by the following question: would the World Bank rather build 5 km of new roads that strictly adhere to long-standing labor and procurement guidelines while having no influence on the 495 km of roads built by actors like China (that may not be constructed to the same standards), or would the World Bank rather play a role as one partner among many in building 500 km of roads where it can offer its expertise and some adherence to its standards to make a much larger impact?
Program for Results: The World Bank’s Response
One solution to this problem may come in the form of a new World Bank lending instrument called the Program for Results (PforR). Launched in 2012, PforR is the third of only three financing instruments approved by the Bank’s Board, and directly links loan disbursements to ongoing project results. PforR relies on clients to identify expected results of a program, and disbursements hinge on clients meeting successive benchmarks. Although the Bank does not enjoy the same level of control over project execution under PforR as it does under other lending instruments, PforR ensures that the Bank remains engaged throughout the entire duration of the project and that its expected results are achieved. World Bank staff indicate that PforR is already even more popular than anticipated, with 22 approved programs and a further 19 under review. The Bank has placed a limit on PforR funding at 5 percent of total annual lending, but demand for PforR projects will soon exceed that cap.
The PforR draws its strength from its focus on processes and results rather than inputs, as well as from its engagement with local actors that span the public-private divide. Instead of guessing at what local actors need most, PforR encourages local players to identify problems and solutions on their own. This not only leads to focused solutions, but also self-driven institutional reform and capacity building as local players have an incentive to become more adept at identifying results-based solutions on their own. Many developing countries have a cadre of reform-minded technocrats, and linking funding to results gives them political capital when they approach other decision-makers with new ideas. This enables institutional entrepreneurs to more readily form coalitions with more senior leaders who would otherwise favor preservation of the status quo.
Somewhat paradoxically, the strength that PforR derives from its emphasis on local problems and solutions can also make for a wider set of challenges. Without effective management, a focus on local context can create more work and confusion for the World Bank and its clients alike. There is the additional concern that the focus on results provides clients an incentive to manipulate results to meet benchmarks and keep their funding flowing. Most importantly, the reality is that the World Bank will have less control over issues like corruption, human rights, and environmental impacts. Despite the fact that the Bank may have to relinquish a level of control over such issues, the net benefits from the Bank being involved in a wider range of projects which leverage a much greater pool of capital may well exceed the cost of surrendering absolute control over a smaller portfolio of projects.
Internally at organizations like the World Bank, many employees recognize the importance of efforts like PforR. Employees fear for the future relevance of the Bank should it remain fixated on upholding standards that limit its ability to engage in the new global playing field. However, shareholders in multilateral organizations like the World Bank—specifically, the national governments that provide funding for such institutions— are hesitant to implement measures resembling PforR, as are the electorates and civil society organizations which hold sway over those shareholders. This hesitancy comes out of a fear that retreating on standards will have a negative impact on the Bank’s ability to prevent corruption or labor abuses. The concern is legitimate, but fails to acknowledge the limiting effect strict adherence to standards has on the Bank’s ability to deliver broad impact.
A Track to Success?
According to the World Bank, implementation for all but one of the PforR operations are broadly on track. Of the 20 approved operations, 7 have been effective for over a year and have on average disbursed 26 percent of the expected budget. Judging a program is hard so soon after its implementation; there is still not much data and long-term effects remain unclear.
Yet what is also clear is that there is a need for change, and the Program for Results presents a viable instrument for a new approach to development. In some regards, the demand for PforR tells you everything you need to know. Many countries that had initial PforR projects have moved to their second or third such project, and in a survey conducted during the two-year review a reported 65 percent of government officials with direct PforR experience said they were “very likely” to use the PforR instrument again in the next two to five years. In light of this demand, it may be necessary to raise the 5 percent cap to capture the full potential of the PforR instrument. We should proceed with caution, but the early returns are very good.
The best approach will be a middle path. The Bank can maintain its stringent standards for a portion of its portfolio, but PforR should be allowed to grow beyond the current limit.As part of this new balance, the World Bank should work to influence standards that can be applied to all investments in a sector, and back these standards with legislation and money. As noted by a recent participant in a CSIS hosted event, if the PforR delivers as designed it could serve as an instrument to eradicate unfavorable practices, i.e. forced labor, rather than an instrument that avoids forced labor for one specific project. This is a new level of engagement for the Bank.
The PforR reflects the new reality facing foreign aid and lending organizations. With excellent global reputations, world class expertise, and unmatched experience, the traditional multilateral development banks still have a lot to offer. However, there has been an exponential growth in the global financial market, and emerging actors are now crowding the development space. Ultimately, new tools like PforR are necessary if multilateral organizations wish to remain relevant in a changed world. The World Bank hasn’t gotten smaller, the world it operates in has just gotten larger.
Article Published in Forbes.com on March 16, 2015.