The future of World Bank in India

Indian Express, 17 Sept 2006

"India is going towards smaller levels of World Bank lending, and that too mainly for the technical assistance that comes with the loans" World Bank President Paul Wolfowitz told the Indian Express on the side lines of the IMF and World Bank Annual Meeting in Singapore today.

For the last 20 years, the focus of the World Bank has been on reducing poverty. However, the two countries with the largest number of poor people, India and China, have been witnessing rapid growth and easy access to foreign capital through FDI and FII inflows.

In the last 10 years China has borrowed just 10 billion dollars from the World Bank, and that too mainly for the technical asssitance that comes with the loans. Wolfowitz sees India going the same way. An Indian project faces the choice between borrowing from the World Bank or borrowing from global financial markets. This choice is made based on the interest rate and the technical knowledge that comes attached with World Bank loans.

These trends limit the poverty-related lending of the World Bank to smaller countries. Among these, the problems of economic development are the most acute with "failed states" like Afghanistan, Nepal, Iraq and a number of African states like Liberia. The poorest countries of Africa, according to Wolfowitz, are much less well-positioned, both geographically, economically, and even in terms of their recent history and the devastation of war and civil war that has dragged them into such a difficult situation.

So does the World Bank need a new business model, involving a shift in focus away from poverty reduction to "failed states"?

There are two issues in World Bank lending to failed states, said Wolfowitz: need and opportunity. "Failed states" certainly need money. But there is also the question of opportunity. To be able to effectively lend to such countries they should have governments who have administrative and technical capacity to negotiate loans, and design and implement programs. Wolfowitz gave the example of Liberia, which said was certainly a "broken state". President Ellen Johnson-Sirleaf, who recently won elections on the platform of liberal economics, has been able to utilise Bank resources and knowledge for fostering development in Liberia.

Wolfowitz felt that while countries like India and China no longer need concessional assistance from the World Bank, there is still a role for the knowledge that the Bank brings. According to Wolfowitz "we are looking at how we can do a better job of both responding at the low end, if you like, for the countries in desperate need, but also being more sophisticated at the high end for countries that are progressing at spectacular rates of growth and whose sophistication is growing at the same time."

Shanta Devarajan, Chief Economist, South Asia Division, commenting on the direction of World Bank involvement with India, said that World Bank needs to leverage small loans, so that the knowledge inputs are able to help in large projects even though they are not fully financed by the World Bank.

Devarajan said that the World Bank has strengths in monitoring and evaluation. So there is a case for "some technical assistance on the monitoring and evaluation side, not just monitoring and evaluating our own money, but evaluating the whole program".

Devarajan said that with high GDP growth, India will graduate from IDA, at which point, borrowing from the World Bank would happen at close to commercial rates. This would mimic the relationship between the World Bank and countries like Argentina or Brazil, more focused on technical assistance and knowledge inputs.

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