Larry Summers: U.S. Vision of Development Banks’ Future

· Investment in global public goods should be expanded in three core areas: stemming the spread of infectious and childhood disease, protecting the global economic environment, and creating knowledge in sectors such as agriculture. (The Bank defines global public goods as commodities, resources, policies, or services that have significant cross-border externalities that are important for poverty reduction and that cannot be provided adequately without some degree of international collective action.) The World Bank should identify internal resources for increasing funding to the Development Grant Facility.

· The Bank should intensify its work on financial abuses, such as money laundering, inadequate bank supervision, and corruption, which undermine the credibility and efficiency of the international financial system. There is a natural fit between the Bank’s work in this area and its mandate to reform the financial sector, promote good governance, and fight corruption.

· A more selective lending framework is required, with differentiated pricing based on the country and the activity being funded. Over time, the Bank and its regional counterparts should reduce the share and volume of lending to the more advanced emerging market countries, with graduation as a clear objective. Differentiated pricing should be based on the length of the loan, the amount borrowed, and the borrower’s income level. Middle-income countries could be charged more than poor countries to encourage them to look to international financial markets for financing. The Bank should also lend more to countries that use the money well.

· A more careful assessment of the Comprehensive Development Framework experience is needed before an informed decision can be made on using it as the basis for significant changes in the Bank’s organization, policies, and procedures, and resource allocations. The pilot experience underscores the complex operational problems—including the constraints posed by the lack of government capacity and the lack of cultures supporting participation in many borrowing countries—that still have to be addressed before the model can be replicated more generally in Bank operations. "We specifically disagree with the view that the Comprehensive Development Framework necessarily requires programmatic lending," said Summers.

· Development institutions must own the programs they support. There is no question that full country engagement and commitment are vital for aid to have a significant and positive impact. But the fact that a country owns a particular set of priorities does not in itself validate their economic viability. "It is also essential that … the stewards of scarce development resources also own the programs we support and make our own assistance decisions on the basis of a roadmap ensuring real and sustainable development results," said Summers.

· Multilateral development banks should limit their support during financial crises to cases in which lending is needed to avoid unnecessary contractions in fiscal expenditure, restructure banking and other financial institutions, or minimize the adverse impact of the crisis on the poor (by strengthening social safety nets, for example). The adoption of more selective, performance-based lending programs will provide a large and flexible contingent financial capacity for the IBRD and its regional counterparts to respond effectively to borrowers affected by future disruptions in private market finance. None of the nonconcessional multilateral development banks’ windows should expect new capital increases, however. Transparency and accountability these institutions should be increased.