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The World Bank as a money transfer algorithm

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Since its inception, the World Bank has evolved to fulfill three main functions: providing global public goods, generating valuable data and independent analysis, and shifting mainly concessional resources to the poorest countries.

Having recently undermined its credibility vis-à-vis the first two objectives, the Bank should now focus on the third.

Start with global public goods. The COVID-19 pandemic has provided the World Bank with an ideal opportunity to restore its image. But the Bank’s performance – on the sidelines of the failure of the Global Easy Access to COVID-19 Vaccines (COVAX) and in failing to release the money it had committed to purchase vaccines – has was insufficient for health and economic reasons. For now at least, we must therefore temper our expectations about the Bank’s willingness to deliver global public goods, especially in the face of more difficult challenges such as climate change.

Now consider the data and the analysis. Over the years, the data collected and compiled by the Bank – including World Development Indicators, estimates of global poverty and purchasing power parity, and various surveys – have been some of his major contributions. But revelations that senior bank management manipulated data in multiple editions of the flagship Doing Business report (to improve rankings for China and Saudi Arabia in particular) risk undermining the confidence of policymakers. and researchers.

As a result of these stumbles, the Bank’s takeover – or at least its relevance – will increasingly depend on its funding function. But that requires recognizing how much the world has changed. For starters, the share of the world’s population living in low-income countries has fallen from almost 60% in 1990 to around 10% today. Rapid economic growth in developing countries over the past three decades – particularly in China and India – has gradually reduced the number of low-income countries from 48 in 1990 to 34 in 2019. And the total population living in the poor countries went from three billion. to just over 760 million.

These dramatic changes mean that the resource transfer responsibilities of the rich world in general, and the World Bank in particular, are now confined to a small part of humanity in a small set of countries. For countries like China, India, Indonesia or Vietnam, which have moved to middle-income country status since the 1990s, the Bank’s relevance has diminished. Much of this is because, according to our estimates, private credit has grown six-fold over this period, doubling its share of total external financing for these economies to around two-thirds.

But the share of the world’s poor living in low-income countries, which fell from around 93% in 1990 to a low of just over 30% in 2010, has since rebounded rapidly, to over 40%. in 2017, when the poorest countries are lagging behind. behind the rapidly growing emerging markets. The financing needs of low-income countries therefore remain essential to help the poor.

For countries like Ethiopia, Mozambique, Afghanistan and Nepal, foreign aid in the form of grants still accounts for about half of gross external financing, and World Bank loans represent about 15% more. The overall level of foreign aid to low-income countries has increased from about $ 8 billion per year in 1990 to about $ 30 billion, largely due to increased funding for public health. At the same time, the Bank’s share in the external financing of these countries has remained fairly constant.

Non-concessional financial flows to these countries remain low. The exploitation of private markets is even less common: total private finance, including sovereign bonds and commercial loans, accounts for only about 10% of their governments’ external inflows. These governments have increasingly obtained resources from China – just under $ 4 billion a year in the 2010s, according to AidData research – but most Chinese projects abroad benefit countries slightly richer.

The World Bank should base its financing on two principles: low-income countries need a lot of concessional resources, and their governments should exercise more agency (“national ownership” in aid slang) in their choices. policies. Private finance is expensive and still beyond their reach; Chinese loans seem both expensive and strongly linked to infrastructure; and concessional aid appears to be linked to health. The Bank can therefore distinguish itself by providing both concessional financing and untied aid which strengthens the agency of local decision-makers.

Accordingly, the Bank should align its priorities with the growing trend of poor countries to embrace cash transfers and a universal basic income. In a cartoonish version of this idea, a simple “need” -based algorithm could determine the resource transfers required for each country over a time horizon of, say, 5 to 10 years. This approach would not only hand over the agency to borrowing governments, but should also be a step towards simplifying the large and complicated international aid architecture and curbing the excesses of its self-sustaining bureaucracy.

The ongoing talks on the replenishment of the International Development Association, the concessional lending arm of the Bank, provide an opportunity to codify this idea. The Bank’s recent failures do not excuse the United States, the European Union and other donors for being stingy with IDA. On the contrary, they are a reason to be clear about what the Bank can do and to ensure that it is fully funded and focused on its most important remaining function: providing money to poor countries.

The fact that institutions like the World Bank are losing their relevance is more a cause for celebration than lamentation, as it is a sign that the poorest countries need less external aid. But losing its relevance does not necessarily imply impending extinction. The Bank may only be a limited provider of global public goods and a reluctant speaker of truth to power, but it still has a vital, albeit limited, funding role to fulfill. To do this, the Bank will become less of a sprawling bureaucracy and more of an average, lean global money transfer algorithm. Governments of 2-3 dozen poor countries and several hundred million people stand to benefit.

Arvind Subramanian is an economist and former chief economic adviser to the Indian government; Justin Sandefur is a senior fellow at the Center for Global Development

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