Thursday, August 12, 2010

When Top-Down is Needed: World Bank Reform

Reforming the World Bank, by David Phillips, is the most constructive book on the topic I have read.  Phillips, a long-time World Bank staff member, spent his career advising developing country institutions how to make the changes needed to carry out their functions effectively.  Upon retirement, Phillips decided to turn his formidable analytical skills toward his own previous employer.   He has produced a refreshingly different book about reforming the largest international aid institution.

Phillips describes not only the changes that need to be made but also offers insights into how to get them done.  New aid donors and new social technologies threaten to make the Bank and other aid agencies irrelevant if these agencies do not change with the times.   The leaders of those traditional agencies would thus do well to heed the lessons of this book.

In the fourteen years I worked at the Bank and in the ten years since I left, I have read many critiques of the institution from a variety of sources - academicians, NGOs, government commissions, and journalists.  Most are arguments for the Bank to do more or less of something (engagement with civil society, environmental projects, gender projects, infrastructure projects, policy lending, trade adjustment loans, government transparency and corruption initiatives, etc).  Others argue that the Bank should change the way it works at the margin, by making more grants and fewer loans, for example.

But few critiques show much understanding (or even interest) in how to effect the changes prescribed.  That is the great strength of Phillips' book.  He has thought carefully about the forces that have led to changes in the Bank over time, and how they might be brought to bear today.  More importantly, he describes with great clarity the incentives at work at all levels in the institution.  He knows what individual staff and management are held accountable for in reality (vs the rhetoric).  And like Moises Naim, former board director of the Bank (and most recently editor of Foreign Policy Magazine), Phillips is able to elucidate the incentives facing the board of directors as well.

The crux of this book (and something not duplicated by Naim or others) is Phillips's insights into the tensions between management and the board.  Those tensions are a binding constraint to real reform and change at the Bank.  They are all the more intense because the Bank has a resident board of directors that typically meets twice a week(!).  Phillips describes the sophisticated (and rational) efforts by management to keep the board from micro-managing by flooding the board with too much information to digest. The board, in return, distrusts management, and repeatedly tries to rein in management initiatives.  This vicious cycle eats up a huge amount of staff and management time. The brainpower, relationships, and energy of board members are also sapped by the struggle with management instead of applied to development problems.

The result is an inward-looking institution whose whole adds up to less than the sum of its parts, and whose ability to change and innovate is sharply limited.  Before I left the Bank in 2000, I asked many of my colleagues, whom I admired greatly, what percentage of their skills, energy, and time got applied directly to development challenges facing their client countries.  The response I got from most of them was "twenty-five to thirty percent."  The rest of their potential was dissipated on internal processes and compliance with regulations.  Given the tremendous assets of the Bank in terms of people, money, and relationships, this squandering of potential is a real tragedy - especially for the world's poor.

On the eve of my departure from the Bank, one of the managing directors asked me for advice on his ongoing reform effort.  "What do you think are the most important things?" he asked.  I told him that in my view real change would not happen unless the Bank deliberately subjected itself to outside competition that threatened some of the Bank's own resources.  Only if the Bank had something concrete to compete against could its real progress be assessed objectively, and only then would the board and management feel compelled to develop a more productive way of working together in order to survive.

The managing director was aghast at this idea, since he felt it would threaten the very institution he was charged with protecting.  But this is short-term thinking.  In the end, it will be up to the board and the Bank's shareholders, including the US government and others, to show the courageous leadership needed to bring the Bank into the 21st century.  Without such leadership, the Bank will remain insulated from competitive forces and will continue using the majority of its resources on internal processes rather than on promoting prosperity for the world's poorest.  But if the will to lead is there, Phillips' book can help guide the way.