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Featured Research Profile: Fall/Winter 2015-16
How (not) to run a bank: Georgetown economist Martin Ravallion examines World Bank success and failures.
The decade or two after WW2 saw many of the world’s poorest countries gain their independence from Colonial rule, and they were hoping to rapidly become less poor. Economics taught policy makers in those countries that a higher investment rate is crucial to assuring faster economic growth. Being a poor country makes it harder to finance the required investments from domestic savings. Yet rich countries should have ample savings available that might be profitably diverted to this task. In an ideal world, global capital markets could be expected to bridge the gap. But 70 years ago those markets were thin and/or not trusted as a source of finance.
In response, the United Nations Monetary and Financial Conference, held at Bretton Woods in 1944, created the International Bank for Reconstruction and Development (IBRD)—a core component of what came to be known as the World Bank. (The International Monetary Fund was created at the same time.) The essential idea was that the IBRD would borrow money on global markets to lend to developing countries. The Bank’s AAA credit rating (stemming from conservative lending policies relative to its capital) allowed it to lend on favorable terms. An aid-facility (with a large grant component), the International Development Association (IDA), was added in 1960.
Much has changed in the 70 years since the famous Bretton Woods conference. World Bank lending (IBRD+IDA) now represents only about 5% of the aggregate private capital flows to developing countries. In the last 10 years or so there have been prominent calls for radically reforming, or even closing, the institution on the grounds that international capital markets have developed greatly over those 70 years. It is also claimed by some that the Bank’s efforts are wasted due to poor governance in developing countries.
Does the Bank still have an important role? If so, does it fulfill that role, and if not, how might it do better? In a new paper Professor Ravallion argue that the Bank’s development role today overlaps only partially with its original role, as conceived at the Bretton Woods Conference 70 years ago (Ravallion, 2015). Its role today is complementary to (rather than competing with) the private financial sector, other development banks, and academia. Knowledge-generation is central to that role. Development knowledge has properties of a public good, which the Bank can generate in the process of actually doing development on the ground.
Threats to the Bank’s effectiveness: There is still much appeal to the bundling of knowledge with lending that has been the distinctive feature of the Bank’s operations. But there are a number of threats to the efficacy of this model.
There have been some longstanding concerns that the Bank’s “lending culture” rewards operational staff for the volume of their lending, with only weak incentives for assuring that knowledge is both applied and generated in the lending operations. The pressure to lend influences the Bank’s ability to deliver objective policy advice to client countries, even when it is not welcome politically. Too often the Bank’s “country strategy” essentially mirrors that of the government, which may or may not serve broader long-term development goals.
Another threat is the perception that the Bank’s most powerful shareholders have excessive influence on its operations and policy advice. The U.S. has long been identified in this role, though some other countries have also been keen to have their say. Some critics are concerned (rightly or wrongly) about conflicts of interest when the Bank gives advice to developing countries.
These are threats to the Bank’s effectiveness as a knowledge leader in both the public and private sectors. All parties—both clients in developing countries and private investors—must have confidence that the institution is not pushing lending for its own sake or beholden to a few powerful owners. Only then can the Bank be accepted as the source of the objective policy advice and information that is needed.
Recent organizational changes have made some effort to put knowledge in the driver’s seat by organizing the Bank around a set of sectorally-defined “practices.” In the end the organogram has changed rather little. However, the threats to the Bank’s effectiveness are unlikely to be solved by changing the Bank’s organogram. The incentives of managers and staff also need to change, to assure a better alignment with development goals. (See Ravallion, 2015, for some examples of specific proposals for reform from past Bank staff.)
Knowledge Bank? There has been much rhetoric about the “Knowledge Bank” over the last 15 years, but Professor Ravallion not alone in believing that the reality has fallen short of the rhetoric. There is a chronic and growing underinvestment in the kind of rigorous research that is needed to identify and address pressing development issues—both the constraints on rapid poverty reduction at country level and the global public bads that threaten us collectively (ranging from climate change to pandemics). Research has been under-valued and under-funded.
Granted we still see some high-quality research at the Bank, though not always on high-priority topics. We see more ex-post evaluations today than 20 years ago. However, much does not get evaluated, and what gets evaluated is a non-random subset of all projects, casting doubt on what we learn about the whole. Too often, methodological preferences drive what gets evaluated rather than the knowledge gaps facing policy makers. Alongside this, we see fewer and less rigorous ex ante evaluations, which make explicit a project’s economic rationale—why the project is expected to have a social value justifying its cost.
Three changes are needed: Echoing the observations of others within and outside the Bank, three things need to change:
• First, the Bank needs to be more ambitious in identifying and addressing the most pressing knowledge gaps we face today. Policy advocacy must give way to well-informed and objective country-specific analysis. This can be accommodated within the Bank’s traditional country-lending model.
• Second, the Bank’s lending operations must be driven by knowledge of the binding constraints on poverty reduction in specific country contexts and its analytic capabilities must be brought more systematically into its operations from the outset. The Bank’s knowledge generation efforts must inform the nature of its lending and be informed by that lending—rather than simply serving lending when called upon. This requires quite fundamental changes in staff and managerial incentives and resource allocation within the current structure.
• Third, the Bank’s present country-based model needs to be supplemented by a model with greater capacity for supporting the provision of global public goods. If one was to sit down today to design a mechanism to support the cross-country coordination needed to address shared threats it is unlikely that one would come up with the Bank’s current country-lending model. A new model, or possibly a new institution, is called for.
Previously Featured Research Profiles:
Fall/Winter 2015-2016 Featured Research Profile: How (not) to run a bank: Georgetown economist Martin Ravallion examines World Bank successes and failures.
Spring/Summer 2015 Featured Research Profile: Leaning in,... sort of: Georgetown economist Mary Ann Bronson explores reasons why men and women make different post-secondary educational investments.
Fall 2014 Featured Research Profile: Carbon emissions make the global economy tipsy... Harrison and Lagunoff study a "business-as-usual" scenario in a tipping model.
Spring 2014 Featured Research Profile: Collateral Damage to Standard Economic Theory... GCER Fellow Dan Cao shows how incorrect beliefs can fuel a crisis.
Fall 2013 Featured Research Profile: Oh what a tangled web we weave... Anderson and Smith explore the dilemmas of deception.
Winter/Spring 2013 Featured Research Profile: Unintended Consequences in the Struggle for Equal Rights: Anderson and Genicot explore the surprisi1g relationship between suicides and female property rights in India.
Fall 2012 Featured Research Profile: Gale and O'Brien sing the blues over Use-or-Lose!
Spring/Summer 2012 Featured Research Profile:"What a piece of work is a man! How noble in Reason! How infinite in faculties!" ... But how much is he worth? Huggett and Kaplan provide an answer.
Winter 2012 Featured Research Profile: Happiness is in the air! Levinson uses happiness surveys to put a dollar value on air quality.
Fall 2011 Featured Research Profile: Junior, the Risky Investment, Grandma, the Insurance Contract, and other bedtime stories as told by Gete and Porchia.
Spring-Summer 2011. Featured Research Profile: Ludema, Mayda, and Mishra show that when firms talk, governments listen.
Winter 2011. Featured Research Profile: Bachmann and Bai examine the effects of wealth bias in the policy process.
Initiatives: The Georgetown Center for Economic Research sponsors and supports a number of research initiatives within the Department and throughout the University.
Gui²de. GCER co-sponsors the Georgetown University Initiative on Innovation, Development and Evaluation (Gui²de). Gui²de conducts empirical field-based research to assess the impact and effectiveness of interventions and policies aimed at empowering individuals in developing countries to improve their lives.
GCER Distinguished Visitor Series. The Distinguished Visitor series is a mentoring program that brings in top economists from around the world each year. The Distinguished Visitors meet with faculty and students, present their research, and exchange ideas over an extended stay. Here are the links to the Distinguished Visitors Series in past years:
IZA-GCER Young Scholars Conference. The Y-S conference is jointly sponsored by IZA, the GU Department of Economics, and GCER. Its main objective is to expose young scholars to the world's leading labor economists through a week of presentations. During the one week program, each of five preeminent scholars will present his/her research, and speak to the Y-S participants about academic work in the field of labor economics.
GCER Alumni Conference. The GCER Alumni Conference is a biennial event. It is organized primarily by former GU PhD students who have graduated and moved on to successful careers as scholars, researchers, and teachers at various institutions. Held on the GU campus, the alumni conference aims to bring together recent Ph.Ds, faculty and current graduate students as well as other researchers in the greater DC area. The conference will include sessions in different areas of economics; at least one session will be reserved for current graduate students intending to go on the job market.
The Washington Political Economy Conference.The inaugural Washington PECO, a political economy conference hosted jointly by the Georgetown Center for Economic Research (GCER), the Department of Economics, the School of Foreign Service and the Department of Government at Georgetown University was held in Georgetown University on March 21 and 22, 2014.
The Georgetown Center for Econometric Practice (GCEP). An initiative by Georgetown Center for Economic Research (GCER) in partnership with the Center of Microdata Methods and Practice, GCEP's mission is to contribute to the economic policy debate by promoting the knowledge and practice of econometrics among the DC economic research and policy communities. To do so, GCEP will provide a number of activities ranging from training courses covering the fundamental of econometric analysis to seminars and masterclasses taught by experts working on the frontier of econometric research. Link to GCEP's website.