Peeling Away the Layers: Why the Principle-Agent Model is Controversial for the IMF and World Bank by Kimberly Milligan

In 2000, thousands in Washington D.C protested inequitable globalization at annual IMF and World Bank meetings. In 2015, people of Lima rallied to protest international organization interventions that compound extraction of resources. The World Bank and IMF’s missions are to facilitate meaningful international cooperation. So then, why do they face such harsh criticism over their developmental strategies? Perhaps it is just the force of pessimistic realism that shapes this critical eye over international organizations. Although, it could just be the structure of leadership which causes incoordination of planning and execution of projects. Overlapping duties and unclear connections between principles and agents needs to be examined.

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The principle-agent model represents a hierarchal system. Essentially, there is an authority, the “principle”, which gives direction for an actor, the “agent”, to act. For international organizations, this is an extremely complex web of principles and agents (see the two charts above). 
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Vaubel, R. (2005). Principal-agent problems in international organizations. Springer Science, 125-138. doi:10.1007/s11558-006-8340-z

 

Experts discuss the need for feedback and accountability of international actors. For example, Tanzanian infrastructure gives a clear visual of this argument—In the past 20 years, two billion dollars were poured into road building projects in Tanzania, but there are virtually no developmental improvements for country. Borrowers in Tanzania have written over 2,400 reports for their donors, but these reports give false feedback that diverges from the real issues that poor in borrowing nations want assistance with. When there are failures in aid such as the financial crisis in Bolivia in the end of the 20th century, there is no sole organization to place blame on. If there were, it would fix the cycle of project failures and unethical policy experimentations that international organizations make in global south countries. 

Let’s say voters are the principle and international parliaments are the actors. Then, the international parliaments also act as the principles that give direction to international organization agents. This seems to make sense, right? Wrong. Vaubel elucidates that even in this logical principle-agent model, lack of legal authority (or accountability) means that agents have little power to represent their principles in the international sphere. Additionally, the incentives of principles and agents rarely line up—international organizations primarily focus on quantifiable growth which diverges from humanitarian duties that international parliaments and voters may want. 

 

For accountability and feedback to be properly integrated, the principle-agent model needs to be revised. Easterly suggests adding competition through a bid system for supplying aid to developers plus the use of independent evaluators. This could increase the incentives of select international organizations to fully execute development projects, hence cutting down on the web of principles and agents. Developmental aid would become more long-sighted and stronger prescriptions could be offered to aid recipients. Although international cooperation is necessary at many levels, its application to developmental aid and crisis management actually increases transaction costs (these are factors that add friction between the market and its users). A more linear principle-agent model that peels away excessive layers could have beneficial results for the reputation and efficacy of the IMF and World Bank.

 

References:

 

Easterly, W. (2006). Chapter 5: The Rich Have Markets, The Poor Have Bureaucrats. In The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done so Much Ill and So Little Good (pp. 165-207). Penguin Books.

 

IMF. (n.d.). Governance Structure. Retrieved April 20, 2019, from https://www.imf.org/external/about/govstruct.htm

 

Vaubel, R. (2005). Principal-agent problems in international organizations. Springer Science, 125-138. doi:10.1007/s11558-006-8340-z

 

World Bank. (2019, April 9). Organization. Retrieved April 20, 2019, from http://pubdocs.worldbank.org/en/404071412346998230/The-World-Bank-Group-Organizational-Chart-English.pdf

 

 

 

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