What will the World Bank’s role be in the twenty-first century? The Bank was originally conceived as a public sector development agency lending to developing country governments or against government guarantees. Its brief was to augment deficient capital flows to developing countries in a culture where governments were seen as the main agencies for growth. It must now adapt to a world in which:

• Private capital flows to developing countries are at an all-time high.

• The private sector is the dominant engine of growth in developing countries.

• Environmental issues are creating new demands.

• The Bank’s own resources are becoming increasingly stretched as a consequence of cuts in its administrative budget.

The World Bank combines banking (financial intermediation) and development assistance functions, with the performance of each function benefiting from the other. Policy conditionality cements the two functions, enabling the Bank to lend with greater security than private banks can, and allowing it to reward governments that pursue successful development strategies. A privatized World Bank would lack the authority to apply policy conditionality. The world would gain one more large international bank but lose its leading development agency.

If fostering private sector investment in developing countries is to become the World Bank’s main objective, it will entail a substantial reorganization of the World Bank group. The group currently comprises four separate entities with economic functions:

• The IBRD borrows from financial markets against member government guarantees and onlends against client government guarantees.

• The IDA is financed from group net income and by direct grants from member governments. The IBRD and IDA have historically been the largest components in the World Bank group, but the shift toward lending to the private sector requires a major shift of resources toward the IFC and MIGA and away from the IBRD. The poorest countries will continue to rely on IDA funding. This should remain the priority for investment of World Bank group profits.

• The IFC borrows in its own name without member government guarantees, and lends to private sector projects without client government guarantees. The IFC should be recapitalized by an injection of private-sector funding, perhaps with private sector banks becoming minority shareholders.

• MIGA is financed via the IBRD. Refinancing does not present major problems since this can be through direct transfer of resources from the IBRD. It is urgent that governments agree to the refinancing of the IFC and MIGA. (The Bank should lend less and guarantee more, with the consequence that borrowing countries may be encouraged back to the private capital market. This shift, which implies increased prominence for MIGA, may be helped by an examination of Bank procedures for pricing guarantees, and for provisioning against potential default.)

The proposed injection of private sector finance into the IFC would amount to partial privatization. It would simultaneously increase the World Bank group’s capacity to lend to the private sector, while subjecting it to the discipline of producing an adequate return to equity holders. Placement of shareholdings with private banks would reinforce the principle of complementarity with the private sector. The proposal will put the IFC in a position to become the lead development agency in the opening decades of the new century, while maintaining the development assistance capability of the whole World Bank group with regard to the entire range of developing countries, including the least developed countries.

The World Bank should become a facilitator instead of a provider, seeing itself as augmenting rather than substituting for private sector investment. The Bank should concentrate its lending in two areas: the least developed countries, many of which are in Africa; and reconstruction activities in Eastern Europe and the former Soviet Union (perhaps shortly also in Cuba) where there are major capital and institutional infrastructure deficiencies. In other regions the World Bank should move from direct provision to facilitation, either through increased use of IBRD or MIGA guarantees, or, where appropriate, through a shift from IBRD loans to IFC loan participation in conjunction with private sector banks.

[President James D. Wolfensohn has launched a major strategic review to respond to these challenges. He has proposed a Strategic Compact under which member governments will grant the Bank additional resources over the next three years. This will allow the Bank to improve its performance and release resources for development assistance. The Board of Directors approved the Compact on March 31, 1997.]