In recent years several divisions within the World Bank seem to have made a sort of institutional rediscovery: to wit, that private enterprises are typically better managed and more efficient than government-run corporations. Fortified by this insight, the bank has been urging Third World countries to privatize their state-owned businesses. This is good advice--so good, in fact, that the bank itself should be prepared to practice what it preaches. It is time for the World Bank to begin an orderly transition to private ownership. This is an especially auspicious time to make this break with the past because the World Bank has a new president--James Wolfensohn, the internationally known investment banker. Transition to private World Bank ownership promises to save taxpayers in America and other Western countries billions of dollars in the coming years--even to refund billions of dollars to their national treasuries. No less important, a privately owned and operated World Bank could be more effective at promoting and supporting international economic development than the current organization.

The bank’s present problem is as simple as it is profound: This multilateral institution has outlived the problem it was designed to solve. As originally envisioned in 1944, the World Bank was supposed to promote international investment for war-ravaged or decolonizing societies--for countries, so the thinking went, that might otherwise fail to attract foreign financial resources simply because world capital markets were not working efficiently.

In 1944, this was a reasonable concern. By the early 1970s, however, it was no longer plausible to argue that international capital markets were unduly averse to risk in developing countries. To the contrary: Whatever else one may say about it, the trillion-dollar “Third World Debt Crisis” of the 1980s attested to the fact that large amounts capital were indeed available to the World Bank’s low-income members-states.

Deprived of its genuine assignment by real-world developments, the World Bank has been floundering for 20 years, lurching after new missions to justify its existence: “debt crisis” management, Third World policy reform, aid to post-communist societies, environmentally sound growth, “public enterprise” restructuring, etc. In this never-ending quest for a new raison d’etre, however, the World Bank has drifted ever further away from the practices and standards that actual banks are expected to maintain.

Two major areas of current World Bank activity are loans for “structural adjustment” and “human resource development.” The former involve loans to governments in return for “policy reforms”; the latter underwrite social spending on health, education and other programs said to augment “human capital.” While philanthropists might deem these to be deserving works, the inconvenient fact for an organization calling itself a bank is that these expensive schemes are being financed without any project collateral or the ability to repossess project assets in the event of a loan default.

The Bank counters such criticisms by pointing to its triple-A credit rating, and by arguing that client governments would not dare renege on World Bank loans for fear of repercussions on their ability to borrow elsewhere. This defense of its activities, however, inadvertently pinpoints a critical flaw in the bank’s standard operating procedures.

For thanks to its triple-A credit rating (or, more precisely, to the official guarantee that taxpayers from the U.S. and other Western countries will redeem any bad loans), the bank can offer money for questionable projects, or to economically irresponsible regimes, at rates far lower than any commercial lender would even consider. And thanks to its preferred creditor status, the World Bank can expect to be repaid before any commercial lender in the event of a default, “rescheduling,” or financial crisis on the part of a client government. This perverse incentive structure threatens to expose taxpayers in solvent countries to never-ending Third World bailouts.

The World Bank’s problems are vividly illustrated by its role in the Mexican debacle of 1994. In 1994 the bank’s total loan exposure in Mexico was nearly $12 billion--about 10% of its outstanding lending. Yet bank staffers never warned the bank’s executive directors about the worrisome changes in Mexico’s economic fundamentals. After the financial storm finally broke, the World Bank rushed in as part of the rescue team, proposing $2 billion in new, crisis-justified loans to the Mexican government, at rates far below those available in the commercial market.

Through its actions and inactions in Mexico, the World Bank amplified an economic dislocation in which private investors lost tens of billions of dollars, and displaced commercial risk-capital with moneys guaranteed by Western taxpayers. No less important, its feckless approach to “development banking” has arguably worsened Mexico’s development prospects for years to come. If the World Bank is to make a positive contribution to the international economy, it must abandon its quasi-parasitic niche within the financial community. It must instead produce value-added services for its customers, on behalf of its owners. This transition can be accomplished by an orderly and deliberate privatization of the World Bank.

How to privatize an enormous, international public enterprise bound by a multiplicity of noncommercial laws and agreements? In practice, the task would not be nearly as daunting as it might sound. We could start with the immediate privatization of the World Bank’s private sector development subsidiary, the International Finance Corporation. We could also immediately cease to replenish, and prepare to terminate, the World Bank’s concessional aid window, the International Development Association. Next, we could insist on a strict interpretation of the bank’s existing charter, which stipulates that the World Bank facilitate private investment in productive projects only. By a faithful reading of its Articles of Agreement, the bank would extricate itself from the business of funding social spending programs and “policy reform” efforts in client states.

The bank could instead concentrate on such activities as providing export credits or guarantees for commercial projects in low-income member states. Through such a reorientation, it might even be possible to work out an agreement through which the World Bank would replace the various bilateral export credit agencies now maintained by Western governments. A risk-based fee structure would help to impose a financial discipline on both project managers within the bank and client governments that is conspicuously lacking today.

The remaining steps to full privatization are more complex, insofar as they involve fairly technical financial questions and the emendation of the World Bank’s Articles of Agreement. There are many feasible strategies for getting from here to there. All of them would include the following steps: eliminating recipient state repayment guarantees; managing the bank as a viable for-profit financial institution by shaking up its United Nations-style bureaucracy and paying dividends to governments shouldering financial risk; opening World Bank ownership, and the bank’s board, to private participation; and retiring the taxpayers’ guarantees.

Operating as a private profit-seeking entity, the bank would reinforce the soundness of the international financial system. It would repay the Western taxpayers who have long supported it. Best of all, it would help to establish new rules for economic policy in low income regions--and thereby hasten the ultimate alleviation of material poverty in our world.  

Nicholas Eberstadt is a visiting scholar at AEI. Clifford M. Lewis, formerly an official with the World Bank and the U.S. Agency for International Development, directs Stornoway Investments in Washington. A longer version of this article will appear in the National Interest.