The World Bank has become in large part superfluous. That may sound provocative, but it is accurate. Demand for World Bank long-term investment loans and policy-based lending in middle-income countries is diminishing, as developing countries gain increasing direct access to capital markets and receive foreign direct investment.

In fact, only aid to poor countries, which the Bank administers through its International Development Association (IDA), the body that provides long-term loans at below-market interest to the poorest countries, remains in high demand. But aid by itself is failing to affect growth and poverty in recipient countries. The Bank needs to adapt to changing circumstances. Yet it seems to be doing the opposite. Indeed, it is fighting to keep up both its lending and aid, while not doing enough to sponsor sound development policies.

Private net flows to middle-income countries have increased enormously. In the past 10 years, about 40 out of the 60 middle-income World Bank borrowers received on average net private lending and investments equivalent to at least 3 per cent of their gross national product per year. For 25 of the borrowers, annual private capital inflows exceeded 5 per cent of GNP. Net private flows to all middle-income countries were on average equivalent to 4 per cent of GNP. World Bank net flows were 40 times smaller. The Bank obtained these underwhelming results in spite of pushing loans in noncore areas and mixing loans at market terms with aid for some countries that already had ample access to foreign capital. China, for example, became the largest World Bank borrower in the 1990s.

The Bank also continued to administer aid in the guise of investments to countries unable to use it effectively. This is either the result of the recipient countries’ incompetence and corruption or because of their poor domestic policy environments.

Much of this transfer of resources was done under the banner of "fighting poverty" or pursuing other worthwhile social objectives. But the results have been disheartening. The knowledge that providing aid is futile where good policies and good government are not in place did not make much difference, even though the Bank’s own research had confirmed this.

To deflect public attention from these failures, the Bank resorted to sponsored debt forgiveness for the most indebted poor countries—often also the most profligate and incompetent of them. In doing so, it advocated a policy that has never been shown to exert positive growth effects.

Financial intermediation is, in fact, being performed by private capital markets, and where they do not yet reach far enough, it could be done by existing regional development banks. In this respect the World Bank could become expendable. But the Bank still has a useful and unique role to perform: encouraging the right development policies and transferring the right development knowledge are functions that cannot easily be shifted to other existing public institutions or market mechanisms.

The Bank’s big shareholders, starting with the U.S., should keep this in mind when they re-examine the strategic functions of the Bank, a task that cannot be delayed. The World Bank’s overarching aim is the pursuit of economic growth where conditions for it are not yet present and market reach is not wide enough. It should, therefore, focus its future lending activities in low-income and lower middle-income countries not yet capable of accessing capital markets and external technology on their own.

In countries without sound macroeconomic policies, establishing them should be the priority. Lending for balance of payments purposes should be left to the International Monetary Fund. In addition, IDA should make passable governance and accountability in the use of resources and actual performance indispensable conditions for the continued supply of aid to poor countries. The objectives pursued should be strictly economic and developmental. Bank engagements in noneconomic areas should be stopped.

A smaller and more effective organization would emerge from all this. The alternative is to let the World Bank gradually become just another aid lobby, indistinguishable from any other international lobby or pressure group. This would hardly be a valid raison d’etre for a Bretton Woods institution.