20 Apr 2009  Research & Ideas

Misgovernance at the World Bank

Board members may be inclined to advance their own interests at voting time. This appears true for the World Bank's Board of Executive Directors, too. The problem? Many countries are being shut out of development funding. New research by Harvard Law School student Ashwin Kaja and HBS professor Eric Werker tells why misgovernance at the World Bank should be corrected. Key concepts include:

  • A majority of the 185 World Bank member countries never or rarely get a seat on the Board of Executive Directors.
  • Kaja and Werker's research shows that a developing country sitting on the board may see its normal funding levels doubled during its service on the board.
  • Appropriations committees at other large international organizations should be scrutinized for similar conflicts of interest.

 

Getting a seat at the table often makes all the difference in the world. New research from Harvard Business School suggests that this idea holds true literally at the World Bank, where the 24 countries serving on the Board of Executive Directors benefit their own interests at funding time.

According to the study, each developing country on the intergovernmental aid organization's Board of Executive Directors receives a significant boost in loans and grants—effectively a doubling of their funding, equivalent to a $60 million "bonus"—compared to those countries not on the board. Indeed, a majority of the Bank's 185-member countries never receive a chance to sit at the table, suffering in tangible and less-tangible ways in terms of continued poverty for their people. In 2008 the World Bank's two main development institutions committed to distribute almost $25 billion to 300 development projects around the globe.

The study, by Harvard Law School student Ashwin Kaja and HBS professor Eric Werker, is detailed in the working paper "Corporate Misgovernance at the World Bank" [PDF]. Theirs is the first known study to empirically investigate problems in governance of an international appropriations committee. Kaja and Werker's research also suggests the political dynamics and potential for conflicts of interest that may occur on other large, intergovernmental appropriations committees such as those at the European Union, the International Monetary Fund, regional development banks, and UN agencies.

Overall, the researchers say, the World Bank is quite well run—the issue is one of misgovernance, not malfeasance. "Ashwin and I highlight a setting in which fair institutions can generate unfair outcomes because the overseers of Bank funds are also the beneficiaries," wrote Werker in an e-mail from Liberia, where he was conducting another study.  

The World Bank was a necessary subject for investigating such issues, continued Werker.  "While the consequences of bad corporate governance in the private sector can be quite large—misallocated capital, shareholder losses, and, in the extreme, financial crises—at the end of the day the investors by their nature have some tolerance for risk.

"In an aid organization, however, the costs of misgovernance are borne not by the investors but by the citizens of poor countries in terms of fewer new health clinics, schools, or technical advisors."

Werker explained more about the study and its implications for global society in an e-mail Q&A.

Martha Lagace: Why did you and Ashwin Kaja decide to look closer at the World Bank?

Eric Werker: We were not drawn to the World Bank by any particular scandal; in fact, the Bank is probably among the cleanest and better-managed of the inter-governmental organizations. But the Bank's institutional structure, namely a representative and highly active Executive Board, made examining the political dimension of misgovernance a feasible undertaking. The data are all publicly available, and have been for decades; it was just a question of looking at the data in such a way as to test whether the structure of the Executive Board led to systematically biased allocations of loans and grants.

Q: You found that membership on the Executive Board makes a huge difference in loans and grants going to the home countries of the directors—that developing countries can expect a doubling of their funding levels when they sit on the board. You also noticed that a majority of World Bank member countries never or rarely get a seat at the table. Could you give us some background on the board?

A:The Board of Executive Directors answers to the Board of Governors, which is made up of the finance ministers of all the World Bank members. Obviously, having that larger body get into the nitty-gritty of daily decisions would be arduous and inefficient; for that reason, the Executive Board was created to oversee the operations and aid allocations.

For its part, the Board of Executive Directors is the decision-making body of the World Bank's two primary component institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). They meet at least weekly; the IBRD board currently has 24 members. (There is a separate board for the IBRD and the IDA, but the latter is basically a 95 percent subset of the former.) Countries are elected for two-year terms, and each country on the board, with the exception of the very large ones like the United States, will represent the interests of a handful of other countries.

In 2008, the IBRD and the IDA committed nearly $25 billion in loans and grants through some 300 development projects around the globe. Where did the money go? Our paper examines whether those countries that have a seat on the board award more aid and loans to themselves.

We found that developing countries can expect around a $60 million bonus in the years they serve on the Executive Board. This is a substantial amount, equivalent to a major port renovation or a system of new rural roads.

"With [more] information, non-board members could ask executive directors the hard questions of why some countries fared better than others." -Eric Werker

Q: Your findings suggest fundamental unfairness that has a great impact around the world. Is this a long-standing problem at the World Bank?

A: It is not a new idea that politics drive the allocation of aid decisions. But the view of politics that we normally have is that donors like the United States, Japan, or France may reward their friends rather than simply disperse money where the need is greatest or the impact is highest. In this research project, Ashwin and I highlight a setting in which fair institutions can generate unfair outcomes because some of the overseers of Bank funds are also the beneficiaries.

Q: You saw a big difference in funding results between the IBRD and the IDA: Those developing countries that sit on the IBRD's Executive Board can expect a nearly $60 million "bonus," whereas there was no significant difference in IDA funding. Why?

A: Interestingly, the IDA—which is tasked to provide aid to the world's poorest countries—did not show any evidence of corporate misgovernance. This shows that a strong sense of humanitarian mission, as well as more explicit instructions for who can receive funds, may mitigate the governance problems that arise from limited representation.

Q: What is the goal of this study? Is there anything that weaker member countries can do to get a seat on the board?

A: I think the main service we can provide is to show that board members can be held accountable by data that are publicly available. It would be relatively simple for the Bank to publish the amounts of development projects awarded annually, by Executive Board seat. With that information, non-board members could ask their directors the hard questions of why some countries fared better than others.

Q: Has the World Bank seen your study yet and perhaps commented on the findings?

A: Not yet. Our paper is fresh off the press; we're looking forward to engaging with Bank researchers, managers, and directors.

Q: What are the implications of your findings for other large, international appropriations committees, such as at the European Union, the International Monetary Fund, and UN agencies?

A: Political scientists have examined this question with regards to committees in the U.S. Congress, and scholars of international organizations are only beginning to look closely at these transnational institutions. We need to first assess the damage and study the patterns before crying out for any fundamental changes. The worst outcome would be to saddle these organizations with more inefficiencies that have no real effect on distributive justice.

Q: What are you working on next?

A: I have just started to look into the emerging global institutions that aim to reduce climate change caused by deforestation. Trade in carbon markets has the potential to be a major source of income and technology transfers to the developing world. We have a chance to design these institutions in such a way as to avoid some of the pitfalls that befell our institutions of development and humanitarian aid.

About the author

Martha Lagace is the senior editor of HBS Working Knowledge.