World Bank governance reform. “Puppet on a string”?
The Annual Meetings of the World Bank and the Fund will be held in Washington DC the week of October 21 – 26, 2024. The BRICS+ summit will be held in Kazan, Russia, October 22 – 24. The G20 summit will be held in Rio, November 18-19. Robert H. Wade and Jakob Vestergaard argue that the issues discussed in this short essay should be on participants' agendas with a note recommending preferential treatment.
The governments of most developing countries have become highly critical of the international economic system. Around 70 states – over a third of the UN’s membership – are in debt distress, many paying out more to service just the interest on their foreign debt than they spend on public health and education, some close to default. As a group, most developing countries want substantial changes to the lending policies of the World Bank and the IMF. But this requires that they have more influence in the governance of these multilateral organizations.
The World Bank is a cooperative of states, governed by representatives of those states. From its beginnings in the mid-1940s the United States has been the dominant state in the Bank, reflecting its hegemonic status in the larger inter-state system. It is the only state with enough votes to exercise a veto over major decisions, and it has a gentlemen’s agreement with the Europeans to support whoever the Europeans nominate as Managing Director of the IMF in return for the Europeans supporting whoever the US government nominates as President of the Bank; hence the President has always been an American citizen (always a he). His promised responsiveness to the preferences of Treasury and State is key to his nomination. The benefits to the US include the Treasury Secretary or Secretary of State, as they are being driven home in the evening, feeling free to phone the President and have a chat about developments in various parts of the world.
From the beginning the Europeans collectively have exercised the second biggest influence in the Bank’s governance, in line with their earlier role as colonial masters of most of the developing countries. Japan is now the number two shareholder after the United States, a reliable supporter of US preferences.
After the Global Financial Crisis of 2008-09 (more accurately called the North Atlantic Financial Crisis), which questioned the assumed superiority of the North Atlantic model as the aspiration for developing countries, developing countries agitated for more influence in the Bank’s decision-making (Vestergaard and Wade, 2013; Vestergaard, 2011). Their central argument was that their “weight” in the world economy, as measured by share of world GDP, had substantially risen over the previous several decades, that of the developed countries substantially fallen, which should be reflected in the distribution of shares and votes. The Bank – the only global development bank – remained too much dominated first by the Americans and second by the Europeans, they argued; it still operated too much in the spirit of the post-war inter-state system, when western governments assumed that they knew what governments and businesses of developing countries should do to catch up with western living standards.
Why so much focus on voting shares?
At first glance it is puzzling that states give such importance to their share of votes as a measure of their influence in the Bank and their standing in the inter-state system, because votes are almost never taken at any level of the governance structure. Not in the Board of Governors, comprised of a political representative of every member government; and not the Board of Directors (the Board hereafter), comprised of Executive Directors (EDs), civil servants of member governments, currently 25, seven of whom represent only their own country (US, Japan, China, Germany, UK, France, Saudi Arabia), the others represent multiple countries grouped into constituencies.
The Board is the “engine room” of Bank governance. The EDs are resident in Washington DC and meet several times a week in full session and sub-committees, in formal and informal meetings.
The EDs are well aware of everyone’s relative voting power as they deliberate, as is the chair of the Board, who is responsible for drawing out a consensus or lack of consensus, with no vote. His conclusions are shaped by the vote distribution in the background – and also by him being beholden to the US Treasury and others who promoted his nomination as President, for the President is simultaneously chair of the Board.
The 2008-10 reforms
Before describing the content of the 2008-10 reforms (DC 2010), a note about country categories. For the negotiations about subscriptions and votes the Bank uses the distinction between “developed” and “developing and transitional” countries (DTC). The DTC grouping is bizarre, since it includes countries like Singapore, South Korea, Poland, and the Baltics. Why the Bank continues to use it is a mystery, unless it is to weaken “developing countries” as a cohesive bloc.
In protracted negotiations through 2008 to 2010 the Board agreed, first, to shift 4.59 percentage points (ppts) of votes from developed countries to DTCs. Second, it agreed to create a third chair at the Board for Sub-Saharan Africa, bringing the Board to 25 seats. The intention was to enable stronger representation of African countries compared to the existing situation where two African EDs each represented by some 22-23 states, far more than any other EDs. Third, the Board agreed to establish regular five-yearly reviews of shareholding, with the aim of bringing the distribution closer into line with country “weights” as measured by GDP.
By the time of the start of the scheduled 2015 shareholding review the capital “subscriptions” agreed to in 2010 had still not been fully implemented, mainly because the US Treasury had not been able to secure agreement from Congress to ratify the increase in US capital subscriptions the US Treasury had agreed to back in 2010. When Treasury sent its people to Congress to knock on doors and ask for individual Congress members’ approval, the typical response was, “My voters don’t know and don’t care about the World Bank. If you want my vote, you have to give me X, Y, and Z for my constituency.” Treasury added up the cost of getting approval and concluded it was too high.
By this time the Gross National Income (GNI) share of the developing world had increased from about 14% in the early 1990s to nearly 32% in 2013 at nominal exchange rates and 58% at purchasing power parity exchange rates. But the developing world’s share of votes in the Bank (more exactly, the DTC share) was only 47%.
The 2015-18 and the 2020 “reforms”
The 2015 shareholding review (DC 2015) started a process of negotiation at Board level which would be concluded in 2018 (DC 2018), with agreements being reached step by step. The overall results were as follows, in rough chronological order. First, agreement that the guiding principle for realignments should be to achieve “an equitable balance of voting power”, with a suggestion that “equitable” related to economic weight (share of world GDP). Developing countries agreed amongst themselves that “equitable” meant 50% for developed countries and 50% for developing countries ( DTCs). But this was not endorsed by the Board.
Second, the 2015-2018 review agreed to adopt what was called the Dynamic Formula (DC 2016) for assessing the extent of individual countries’ misalignment, which implicitly ensured that the 50:50 split would not be reached. The Dynamic Formula gives 80% weight to country share of world GDP (at 60% nominal exchange rates, 40% purchasing power parity) and 20% to country contributions to IDA, the Bank’s soft loan fund for low-income countries (at 80% for the average contribution over the last three IDA replenishments, 20% for historic contributions). The IDA weighting ensures that voting power remains mainly in the hands of developed countries.
Third, after complicated and lengthy negotiations, a Special Capital Increase (SCI), the increases varying between countries. This negotiation produced a gross shift of 1.63 ppts in voting power to DTCs. It was followed by agreement on a General Capital Increase (GCI), amounting to an equi-proportional increase by all countries. The two combined made a 20% increase in the Bank’s capital base (roughly half from the SCI, the other half from the GCI).
In all this, some previously over-represented countries lost share as some under-represented ones gained. In contrast to the gross shift to DTCs of 1.63 ppts, the net gain of the DTC bloc, balancing gains and losses, was only 0.21 ppts. China came out with a big gain of 1.26 ppts in its voting power. But it remains under-represented by GDP share and by the Dynamic Formula.
The years of negotiating the outcomes of the 2015-2018 agreement left Bank staff and the Board fatigued, with little appetite for embarking on the next five-yearly shareholding review scheduled to start in 2020 (DC 2020). Then came the Covid pandemic in early 2020. Unsurprisingly, the 2020 shareholding review produced no agreed changes (DC 2021).
In short, as of 2024 little adjustment has taken place since 2008-10, with the partial exception of a non-trivial increase in China’s representation, despite many hundreds of hours of negotiation in the Board and many hundreds of hours of staff time servicing the negotiations. The DTCs as a bloc have just 0.21 ppts more share of votes than agreed at the end of the 2010 shareholding reforms. This falls well short of the vaguely stated aim of gradually realigning Bank voting power with economic weight, unless 0.21 ppts per decade to the developing country bloc is taken to meet the criterion of “gradual”.
By the GDP metric, which is the one developing countries prefer, the US remains somewhat under-represented, most European countries including Britain are over-represented, Japan is over-represented, India is under-represented, and China remains very under-represented. By the Dynamic Formula metric, preferred by developed countries because it includes IDA contributions and thereby keeps them on top, the distribution is somewhat different. Britain, for example, is not over-represented by the Dynamic Formula thanks to its large IDA contributions; also Sweden and quite a few other developed countries.
Why little change?
Our interviews in the Bank suggest several reasons for only incremental increases in the share of developing countries since 2008-10. First, the Bank remains a substantially American bank. The US contributes the largest share of capital, it has the largest share of votes, enough to make it the only member with a veto, it appoints the President, always an American citizen, who is also the chair of the Board (therefore responsible for inferring the content of Board consensus or lack of), and most of its economists have PhDs from North American universities. Defenders of the American role justify it with the claim that democracy, freedom and prosperity around the world depend on American leadership, which must include the Bank as one of its instruments. Using the Bank to advance American goals confers the legitimacy of “multilateralism” on US bilateral goals.
An Executive Director from a prominent Latin American country makes the point in relevant Board discussions that “the Bank is still seen as an American institution. It must become more multilateral.” This director reports that African Executive Directors thank him for such remarks, saying they agree but they dare not say so at the Board because their countries depend on the good-will of the Bank.
Second, European states together have a higher share of voting power than the US, and as one of our sources said, “it is the Europeans [more than the Americans] who fight tooth and nail to prevent any realignment”. Some small European countries like Luxembourg and Ireland have shares substantially higher than warranted by the Dynamic Formula, but the big European countries like France, Germany, Italy do not complain because they know that the EU countries vote with one voice and they treat the gross over-representation of small European countries simply as an addition to their own voting power.
Third, Japan, backed by the US, is determined to ensure that it remains number two, ahead of China now at number three.
Fourth, over the past decade the Bank management has tried to “keep China happy” by awarding Chinese nationals high-profile positions, and by giving Chinese companies ample access to knowledge and technical assistance through Bank projects. Chinese companies also obtain a large share of Bank procurement contracts, and our sources disagreed among themselves on the extent to which the large share comes simply from competitive advantage (better and cheaper solar panels, for example) or is significantly raised by “keep China happy” considerations beyond economics.
On the other hand, some sources related how Bank staff dealing in one way or another with procurement might expect repeated hostile questions from US officials in connection with procurement from China, pressing them to investigate forced labor in the production of procured items (solar panels, for example), or the use of components on US sanctions lists, or other grounds for excluding China products.
Fifth, representatives from western countries justify the large share of shareholding and votes in the hands of western countries in terms of “The Bank is first and foremost a bank. Since when have the customers controlled a bank?”, as an ED from a high-income country exclaimed. But the argument that the non-western borrowers should not be allowed to run the lending organization no longer makes sense. China and quite a few other middle-income countries are now capable of lending huge amounts of money to both the Bank and the Fund. By far the largest official bilateral creditor of developing countries is now China, followed by Saudi Arabia, United Arab Emirates and some other middle-income countries.
Sixth, there is a little-noticed clause in the Articles of Agreement called “preemptive rights”. It says that any country that stands to lose relative voting power can simply refuse, insisting instead to be made whole -- to have its share of total shareholding maintained (and it has then to pay to subscribe the additional shares). No wonder that redistributing voting power within the Bank has proven more than difficult.
Conclusion
The elaborate negotiations we describe with reference to 2008-10, 2015-18, and 2020, and resuming now in the run-up to the 2025 shareholding review, is in large part theater. Few of the participants expect that the 2025 review will achieve a significant realignment towards developing countries. Then the process for the 2030 review will bend back on itself, the negotiations will start at much the same place, round and round. The important thing is to be seen to be moving, even without much movement. As Giordano Bruno said in his struggle with the Catholic Church, before the Roman Inquisition burnt him at the stake in 1600, it is naïve to think that power will reform power.
It is hardly surprising that representatives of high-income non-borrowing countries tend to highlight progress in the other two kinds of voice reform, namely, effective representation (such as the third Board chair for Sub-Saharan Africa) and the more nebulous “responsiveness to client preferences”. Their governments and Executive Directors are effectively saying in private: “We obviously cannot allow large middle-income countries (such as China) to have influence on the Board in proportion to their economic weight in the world economy, because then we would lose control of the Bank. But our efforts to listen and to adapt Bank operations to the needs of developing countries also constitute a form of voice reform. And we will do our best to help staff in your (developing country) ED offices professionalize their ability to articulate needs and views in Board meetings”.
Representatives of developing countries find this stance patronizing, given that the developed countries are determined not to allow more than tiny increases in the shareholding and votes of developing countries.
The only thing that might cause a substantial increase in the influence of developing countries in the Bank is serious competition, especially from state-supported development banks controlled by one or more developing countries; such as the Asian Infrastructure Investment Bank, substantially controlled by China, and the New Development Bank, controlled by the BRICS coalition, both started in 2015-16 but till now not posing a competitive threat to the World Bank.
Our title poses a cartoon image of Bank governance, “puppet on a string”, with a question mark. Many critics of the Bank, especially Americans (especially in Congress and NGOs), describe it with another cartoon image, “empire out of (our) control”. Our argument is that it is closer to “puppet on a string”, controlled largely by the US and the Europeans. The credibility of not only the Bank and the Fund, but also the UN Security Council, now depends on instituting a mechanism for curbing the near-monopoly of yesterday’s great powers with more representation of today’s emerging great powers.
Robert H. Wade is professor of Global Political Economy at the London School of Economics.
Jakob Vestergaard is a professor of Global Political Economy at Roskilde University. This essay builds on: Vestergaard, J. and Wade, R. (2013). Protecting power: how Western states retain the dominant voice in the World Bank’s governance, World Development, 46: 153-164. Vestergaard, J. and R. Wade, (2012), “Establishing a new Global Economic Council: governance reform at the G20, the IMF and the World Bank”, Global Policy, January.
Image: The World Bank Group headquarters building in Washington, D.C. Designed by Kohn Pedersen Fox. CC BY 2.0
References
Development Committee (2021). The 2020 Shareholding Review. Concluding Report to the Governors at the Annual Meetings. September 28, 2021. Washington, DC: The World Bank Group.
Development Committee (2020). The 2020 Shareholding Review. Report to the Governors at the Annual Meetings. October 16, 2020. Washington, DC: The World Bank Group.
Development Committee (2018). Shareholding Update. Report to the Governors on Shareholding at the Spring Meetings 2018. April 20, 2018. Washington, DC: The World Bank Group.
Development Committee (2016). The Dynamic Formula. Report to the Governors Annual Meetings 2016. September 20, 2016. Washington, DC: The World Bank Group.
Development Committee (2015). The 2015 Shareholding Review. Report to the Governors. September 28, 2025. Washington, DC: The World Bank Group.
Development Committee (2010). Communiqué from the Annual Meetings of the World Bank. April 25, 2010. Washington, DC: The World Bank Group.
Vestergaard, J. and Wade, R. (2013). Protecting power: how Western states retain the dominant voice in the World Bank’s governance, World Development, 46: 153-164.
Vestergaard, J., (2011). The World Bank and the emerging world order: adjusting to multipolarity at the second decimal point. DIIS Report 2011: 05. Copenhagen: Danish Institute for International Studies.
