The faux scandal at the World Bank has stirred up interest and debate about its operations. Discussing two recent columns about its operations, Professor Anderson makes a very compelling argument that it should focus on grant-makingto the poor, pare back its staff and its cushy remuneration, and stop acting like a bank:

The problem of the Bank qua bank is that it seeks to intermediate private capital markets (with a subsidy), to try and do precisely what Mallaby suggests private capital markets cannot do because capital markets cannot solve all of poverty's problems. The reformers would suggest that the subsidy in the case of the Bank's ordinary lending to middle income countries is not really enough to compete with the functioning of the private markets; the Bank's lending really is a fifth wheel, and it should give that up in favor of activities for which it is not merely a fifth wheel. (snip)

In the case of the poorest countries, however, lack of capital is genuinely an issue. So is the ability to repay any loan. So is technical assistance, and so is any improvement in governance. Why not cause the Bank, therefore, reorganize without the middle-income country intermediation-banking function, and focus solely on soft loans/grants and, let us not forget, technical assistance and governance advising. And focus on countries, societies, that are the poorest. Why endorse half measures?

For if that's what the real value added is, it is far from clear why anyone needs the Bank's goldplated operations -they cost what they cost in part because they are designed to interface with the private capital markets, and to pay the people who do those functions a respectable civil servant salary commensurate with financial professionals in the public sector. In my experience, it is not what one would pay program officers in a foundation dealing with local poverty matters on a grant-making basis, who do not have and do not need the banking credentials on which the Bank prides itself. There are comparably serious skill sets that these anti-poverty program officers need, yes, but frankly they can be obtained at a lower cost, in part because they are not so readily placeable in the private sector. Why not reorganize at a cheaper cost along the lines of far more efficient, far more locally oriented (because less capital markets oriented), far cheaper in terms of transaction costs European aid agencies? (I do not suggest under any circumstances modelling anything on US AID, which is a waste of oxygen.)

If these functions were being carried out by the Dutch, the Swedes, the Norwegians, the Swiss, through their national development aid agencies, how would they do it and what would they pay? Would they pay for a whole banking staff when in fact the operation is aimed at grantmaking anyway, and the money would come from governments in any case, not from the capital markets and relent at a subsidized interest rate? They would - they do - engage in a certain amount of on-lending in which they really do expect to get repaid, but that is far from being the core, let alone over half, of their work.

Why, in other words, should the World Bank continue simply for historical reasons as a bank, a bank designed in cost structure, skill sets, etc., to interface with private capital markets? Why share the pleasure Mallaby takes in noting that slightly under half the bank's outlays went to soft loans and grants - why not think those things should essentially be the whole thing? Why take pride in half-measures that continue precisely the sins that Sebastian correctly sees in thinking that it all can all be done by capital markets? Why not sever the relationship to the capital markets altogether and concentrate on poverty reduction as such?