The World Bank: Myths and Priorities
By Robert Picciotto, Director General, Operations Evaluation, The World Bank, Washington, D.C.
Why is there such disallusionment about development? Why is the World Bank under such intense scrutiny? And what priorities is the World Bank pursuing on the eve of a new development era?
The Untold Development Story
Fifty years ago, when the World Bank was created, the world lay in ruins.  Yet it was a time of optimism.  The victorious industrial democracies were self-confident about turning swords into plowshares and solving global problems. The World Bank was invented as an instrument of economic change for the benefit of all mankind.
Since then, the developing countries, especially the most populous, have prospered as never before. Everywhere, life spans have been lengthened and education and science opportunities have increased. A smaller proportion of the world's people now live in poverty.
So how is one to explain the pervasive discontent about development?
A necessary shift in the role of government is underway in developed and developing countries alike.  But the public has fastened on the notion that the basic premise of development - a functioning state able to "own" development programs - is absent in several developing countries that are incapable of caring for their citizens.
This is a new perception because, until recently, the existence of failed or failing states was masked by the East-West ideological conflict. 
In the old world order, nonaligned states with uncertain survival prospects received bilateral military and economic support irrespective of their development record. Today, the same situations are left unattended until humanitarian intervention becomes imperative, encouraging the presumption that the development enterprise itself is hopeless.
Yet government breakdown remains the exception, not the rule, and the phenomenal economic progress of the developing world remains largely an untold story. Since 1970, the economies of developing countries have grown at an average of 3.8 percent a year. The economies of low income countries, where 3.2 billion people live, grew the fastest, at 5.2 percent a year, or 3 percent per capita. Socioeconomic indicators, such as literacy rates and infant mortality rates, have improved across the board. Rapid growth and reduced inequality have been shared virtues. Development works.
The vision of the Bretton Woods founders - of the World Bank as a universal institution - has largely been fulfilled. More than 100 members have joined the World Bank since its foundation. By now, the bank is not only the largest single source of development finance, but a full-service development institution. It has built up an impressive concentration of data and know-how about the developing world, and acts as a platform for regional and global initiatives. Its development research and training activities are unrivaled.
Myths and Realities
To be sure, the World Bank has much to do in order to be more client-oriented, selective and efficient. 
It has begun a variety of reforms to deal with its acknowledged weaknesses. Constructive criticism is a helpful spur to continuous improvement, but irresponsible criticism is not, and should not go unanswered. The World Bank has not always put its own case forward persuasively. As a result, a number of myths have been allowed to flourish.
The "White Elephant" Myth
Several critics have used the finding of the World Bank's independent Operations Evaluation Department (OED) that the share of World Bank-financed operations with unsatisfactory outcomes has risen from 15 percent in the 70s to 30 percent or more today to argue that the World Bank is prone to funding wasteful "white elephants."
OED uses stringent criteria for evaluation; it rates lending operations as satisfactory only if they have a favorable development impact (10 percent rate of return or more) and meet or exceed all their major relevant objectives. In fact, three-fourths of the projects supported by the World Bank substantially achieve or overachieve their objectives and of those that do not, many are canceled in whole or in part.
Development is a risky business and it is not possible to know how well the World Bank is doing compared to other development agencies, because they do not attempt similar policy reforms or carry out comparable and comprehensive evaluations of the outcome of their operations.
The Adjustment Controversy
Radical critics argue that structural adjustment programs undermine countries' economic recovery prospects and worsen inequalities. Comparing the state of affairs before and after economic crises, they attribute the symptom of the disease - economic mismanagement - to its remedy, adjustment.
Simply put, developing countries cannot afford to run budget deficits of 10 to 20 percent indefinitely. The goal of adjustment is to put in place measures, which, in conjunction with other policy actions, will facilitate stable growth.
Independent evaluations of the World Bank's adjustment operations confirm that following a crisis, growth resumes earlier in countries where the economic management fundamentals are respected than in countries where they are not. There is also substantial evidence that adjustment, combined with safety-net programs and other measures, alleviate poverty.
The real question is not whether adjustment works, but whether the World Bank has been able to ensure adequate design, ownership and funding of the adjustment programs it has supported. With hindsight, it is clear that too many adjustment loans did not include sufficient up-front action to guarantee success and that policy reversals took place that might have been avoided had the bank better assessed the political economy of adjustment.
The Spending Bank Myth
Some critics have pictured the World Bank as a "spending" organization with a budget out-of-control and a bloated staff.  Economies are feasible and greater selectivity is needed, but, given its mandate, the World Bank is not too large. Few people know that the "back-room" functions of Merrill Lynch, for example, absorb more people than the entire staff of the World Bank. The World Bank's budget as a share of earning assets is 75 basis points - well below the 100 basis points typical of commercial bank establishments.
So how is one to explain the pervasive discontent about development?
A necessary shift in the role of government is underway in developed and developing countries alike. But the public has fastened on the notion that the basic premise of development - a functioning state able to "own" development programs - is absent in several developing countries that are incapable of caring for their citizens.
This is a new perception because, until recently, the existence of failed or failing states was masked by the East-West ideological conflict. 
Finally, the total administrative costs of the World Bank financial intermediation are only a little more than half its total budget. The bulk of these expenditures is for lending and supervision of operations in progress, incorporating project implementation support services for borrowing member countries. Only $75 million is used to service the World Bank's financial engine. This is remarkable, considering that the World Bank borrows about $12 billion annually, invests about $20 billion of liquidity, and manages complex risks across currencies and instruments so as to protect its impeccable reputation in financial markets.
The other half of the World Bank's budget supports a wide range of development and fiduciary services. Almost 40 percent of the World Bank's budget is devoted to research, policy work, advisory services, technical assistance, training, evaluation and public information. Another 10 percent provides aid coordination and cofinancing services and development grants. These services benefit the entire development community.
The "Small Is Beautiful" Myth
Closely linked to the myth that the World Bank is too big is the idea that it lends too much and that it favors large projects, especially dams. Yet, in real terms, the World Bank's lending has remained unchanged for several years. Little of the World Bank's infrastructure financing has been used for larger structures and evidence shows that large projects are not necessarily less successful than small ones. Indeed, recent studies suggest that because they are so visible, large projects tend to be better managed than others and large irrigation command areas often involve economies of scale.
With the reduction of public expenditures following the debt crisis, the demand for private financing of infrastructure services in many borrowing countries has risen. In the end, the issue is less one of big versus small than of effective policies, efficient delivery of services, and harnessing of private resources to build and operate priority projects.
Nongovernmental organizations (NGOs) have performed a useful service by highlighting the social consequences of infrastructure projects. High population densities make it difficult to manage the involuntary resettlement of people displaced by construction. The World Bank has the potential to take the lead, just as it did with respect to dam safety, in helping its developing member countries build the institutions and legal framework needed for socially responsible resolution of resettlement and environmental problems. This will require building more systematic linkages between government agencies and local NGOs.
A Bank of Ideas
Today's development agenda is complex, but widely agreed upon. In helping to carry out that agenda, the bank must ensure that it concentrates its efforts on key policy priorities that are supported by its membership.
To be sure, the World Bank has much to do in order to be more client-oriented, selective and efficient. 
It has begun a variety of reforms to deal with its acknowledged weaknesses. Constructive criticism is a helpful spur to continuous improvement, but irresponsible criticism is not, and should not go unanswered. The World Bank has not always put its own case forward persuasively. As a result, a number of myths have been allowed to flourish.
The following trends are changing the shape of the demand for the World Bank's development services: The World Bank is a shrinking source of net financial flows to a majority of its developing member countries; private flows to creditworthy, reforming borrowers are on the increase; automation is revolutionizing the factory system; genetic engineering is changing field-based agriculture; and electronically driven transactions across continents are forcing the reinvention of financial and trading operations.
The more deliberate support of private sector development implicit in the World Bank's structure, and the more effective coordination arrangements being put in place reflect a worldwide acknowledgment of the limits of government. They also reflect a growing realization that the policies and institutions of each country must be carefully crafted to encourage a competitive private sector. This in turn implies a recognition of the limits of markets.
Thus, the World Bank will need to combine improved public sector management with closer links to private corporations. The bank's borrowing members depend increasingly on foreign investment, technology and access to trading opportunities. The poorest of them need advice on how to connect themselves to the global marketplace. The World Bank will need to play a role in helping to overcome obstacles to entry and market distortions and will be called upon to design new instruments and new processes to intervene more effectively vis--vis the private sector.
Finally, the World Bank's focus on human resource development will need to be sustained and deepened to encompass institutional development and governance. The limits of physical capital as a determinant of growth imply that human capital must be seen as a key development asset. 
A Global Partnership
The World Bank operates within an increasingly crowded and competitive development assistance system. Regional institutions, including the regional banks, are growing in size and influence. Member countries have begun to insist that transaction costs for the system as a whole should be reduced. The tolerance for turf fights and inadequate coordination is wearing thin.
The goal of adjustment is to put in place measures, which, in conjunction with other policy actions, will facilitate stable growth  Simply put, developing countries cannot afford to run budget deficits of 10 to 20 percent indefinitely. .
There is also substantial evidence that adjustment, combined with safety-net programs and other measures, alleviate poverty.Independent evaluations of the World Bank's adjustment operations confirm that following a crisis, growth resumes earlier in countries where the economic management fundamentals are respected than in countries where they are not. 
The real question is not whether adjustment works, but whether the World Bank has been able to ensure adequate design, ownership and funding of the adjustment programs it has supported. With hindsight, it is clear that too many adjustment loans did not include sufficient up-front action to guarantee success and that policy reversals took place that might have been avoided had the bank better assessed the political economy of adjustment.
The World Bank's advantage is that it is global. Accordingly, the World Bank will be called upon to intensify its interactions with other development partners to ensure that the system as a whole works to the benefit of the membership. In particular, the bank will build strategic alliances with other international agencies, private companies and the voluntary sector, which has a special role to play in environmental protection and socially oriented activities. Such efforts at cooperation will strengthen the World Bank and its partners, and serve the well-being of people everywhere.
