Some of the multilateral financial institutions including the World Bank are largely supposed to help developing countries to upgrade their infrastructure to foster growth. Strictly speaking, such a practice is followed only partially. In a prepared testimony, David Malpass, US Treasury's Undersecretary for International Affairs asserted that "adherence to the graduation policy has progressively weakened" and the World Bank lending to countries like China that are rich enough to finance their development has hurt poor countries that need help. Many graduation-eligible countries, even those with strong market access, have continued to demand World Bank financing. Since 2009, countries eligible for graduation from the World Bank aid have received, on average, 40 percent of the World Bank's lending. Out of them, 25 countries had incomes above the graduation threshold and six were considered high income, exceeding dollar 12,475 per capita.
We feel that the remarks of David Malpass on the lending policies of the World Bank are very fair and refer to a major shortcoming of its lending policies. The WB's liberal lending policies for the richer countries would of course shorten the resources, which could otherwise have been placed at the disposal of the underdeveloped countries for various projects. China was a prime example of this practice, as the biggest borrower with dollar 2.4 billion in loans this year though it has a mountain of foreign exchange reserves at its disposal and could easily finance its own development plans from its own resources or can have easy access to private sources of finance from abroad. The World Bank is approached because its resources are concessional and are available on long-term basis while country's own foreign exchange reserves could be deployed towards commercial banks on short-term basis at reasonable rates. Its policy approach could be defended because lending to richer countries helps the quality of the institution's portfolio. However, this sort of behaviour on the part of WB works against the interest of developing countries who are actually in need of foreign exchange reserves to foster their development and address inequalities of income and wealth between the developed and underdeveloped economies. Also, reserves could be better utilised in developing countries because marginal efficiency of capital is generally higher in these countries. So far as the implementation of the proposal is concerned, we think that US Treasury's Undersecretary has set the ball rolling and it is the US which could guide the WB's policies in favour of developing countries because of its clout in the institution. David Malpass is right when he says that developed countries are better able to access private sources of financing and the World Bank could do a better job meeting its commitments to poorer countries while pursuing a financially sound business model. If such a strategy is adopted, all the developing countries, including Pakistan, could gain from the change in WB's strategy. However, since the developed countries are the major shareholders of the World Bank, it could take a long time to convince most of them to change the present policy approach.