In keeping with a mission to alleviate poverty in the developing world, the World Bank claims to focus its lending on the countries most in need of official assistance because of poverty and lack of access to private sector resources. Not so. Seventy percent of World Bank nonaid resources flow to 11 countries that enjoy substantial access to private resource flows. (The share of this group grew from 63 percent to 74 percent between 1993 and 1999: China received 12 percent, Argentina10 percent, Russia 9 percent, Mexico 7 percent, Indonesia 7 percent, Brazil 7 percent, Korea 6 percent, India 4 percent, Thailand 3 percent, Turkey 3 percent, and Philippines 2 percent of nonaid resources).

The development banks [the World Bank and the regional development banks] must be transformed from capital-intensive lenders to sources of technical assistance, providers of regional and global public goods, and facilitators of an increased flow of private sector resources to the emerging countries. The focus of their individual financial efforts should be on the 80 to 90 poorest countries of the world that lack capital market access.

All resource transfers to countries with access to capital market access or a per capita income of more than $4,000 should be phased out over the next five years. Starting at $2,500 per capita income, official assistance should be limited. Emergency lending should be the responsibility of the IMF in its capacity as quasi lender of last resort. This recommendation would ensure that development aid added to available resources.

Performance-Based Grants. Grants should replace the traditional World Bank tools of loans and guarantees for physical infrastructure and social service projects. In poor countries without capital market access, poverty alleviation grants to subsidize user fees should be paid directly to the supplier upon independently verified delivery of service. From vaccinations to roads, from literacy to water supply, services should be performed by outside private sector providers (including NGOs and charitable organizations) as well as by public agencies. Service contracts should be awarded on competitive bid. Payments should be made directly to suppliers. Costs should be divided between recipient countries and the development agency. The subsidy would vary between 10 percent and 90 percent, depending on capital market access and per capita income.

Institutional Reform Loans. Institutional reforms lay the groundwork for productive investment and economic growth. They provide the true long-term path to end poverty. Reforms are more likely to succeed if they arise from decisions made by the developing country. Lending frameworks, with incentives for implementation, should be redesigned to fit the needs of the poorest countries that do not have capital market access. Each developing economy should present its own reform program. If the development agency concurs with the merit of the proposal, the country would receive a loan with a subsidized interest rate. The extent of the interest rate subsidy would range from 10 percent to 90 percent, as in grant financing of user fees.

To underscore the shift in emphasis from lending to development, the name of the World Bank should be changed to World Development Agency. Similar changes should be made at the regional development banks. Development agencies should be precluded from financial crisis lending. All country and regional programs in Latin America and Asia should be the primary responsibility of the area’s regional banks. The World Bank should become the principal source of aid for Africa until the African Development Bank is ready to take full responsibility. The World Bank would also be the development agency responsible for the few remaining poor countries in Europe and the Middle East.

The World Development Agency should concentrate on the production of global public goods and serve as a center for technical assistance to the regional development agencies. Global public goods include treatment of tropical diseases and AIDS, rational protection of environmental resources, tropical climate agricultural programs, development of management and regulatory practices, and inter-country infrastructure.

In its reduced role, the World Development Agency would have less need for its current callable capital. Some of it should be reallocated to regional development agencies, and some should be reduced in line with a declining loan portfolio. The income from paid-in capital and retained earnings should be reallocated to finance the increased provision of global public goods. Independent evaluations of the agency’s effectiveness should be published annually.