Comment on Michaelowa and Michaelowa (2011):Climate business for poverty reduction:The role of the World Bank

Catherine Weaver

Published online: 2 April 2011# Springer Science+Business Media, LLC 2011

Keywords World Bank . Climate change . Carbon finance . CDM . CER

In 1962, Milton Friedman wrote that “there is one and only one social responsibilityof business—to use its resources and engage in activities designed to increase itsprofits so long as it stays within the rules of the game, which is to say, engages in openand free competition without deception or fraud.” Friedman’s statement was clearlydirected at private businesses in market economies, but it nonetheless invokes food forthought when we consider the roles and responsibilities of modern internationalgovernmental financial institutions today. In the case of the World Bank—theinternational organization (IO) under investigation in Michaelowa and Michaelowa’s(2011) insightful essay in this issue—the notion of socially responsible behavior is acomplex one. Is the World Bank (hereafter the Bank) ultimately supposed to be abank, motivated by profit accumulation? Or is the World Bank supposed to be adevelopment agency, driven first and foremost by poverty alleviation goals?

This fundamental tension in the Bank’s raison d’êtré underlies the centralempirical goal in Michaelowa and Michaelowa’s essay regarding the World Bank’sintentions and behavior in emerging carbon markets. Specifically, with respect to theBank’s role in contracting projects under the Clean Development Mechanism(CDM) of the Kyoto Protocol, the authors pose several critical questions. First, is theBank motivated by developing country needs? In other words, is it genuinelyfulfilling its espoused development agency role by acting as a provider of criticalpublic goods that are undersupplied by the private market in the poorest regions ofthe world and directly selecting CDM projects on the basis of their potentialdevelopment impact (rather than rates of return)? Or, alternatively, is the Bank acting

C. Weaver (*)LBJ School of Public Affairs, The University of Texas at Austin, 2315 Red River Street, Austin,TX 78712, USAe-mail: ceweaver@austin.utexas.edu

Rev Int Organ (2011) 6:457–460DOI 10.1007/s11558-011-9114-9

out of self-interest? Is the Bank working as a savvy, profit-oriented entrepreneur byseeking more commercially attractive CDM projects in relatively developed regions?More critically, is the World Bank abusing its comparative advantage in terms of itsclose relationship with borrowing country governments to gain unfair market accessto profitable CDM projects, thereby crowding out the private sector activity that itclaims it is trying to crowd in to carbon finance markets in the developing world?

Michaelowa and Michaelowa nobly attempt to answer these questions by rigorouslyexamining the Bank’s portfolio of CDM projects registered under the Kyoto Protocol.Their analytical results are constrained by data gaps, most noticeably the few years ofavailable information on registered CDM projects, of which the Bank holds only 65 outof 2,171 (3%) as of 2009. But importantly, despite these data dilemmas, the authors layessential groundwork for comparing the geographical location and substantive intent ofthe Bank’s CDMprojects relative to projects managed through the private sector. This inturn offers a viable means for interested stakeholders to assess both the present andfuture behavior of the Bank, and thus hold the Bank to account for its rhetoric regardingits pro-poor, pro-market role in carbon finance.

Michaelowa and Michaelowa test three hypotheses. First, if the Bank is reallypro-poor in its carbon finance philosophy, we should see the Bank selecting CDMprojects not only in the least developed countries worldwide, but also in the poorestregions within developing countries. Second, if the Bank is truly motivated byrecipient need rather than its own interests in deriving profits, the Bank should selectprojects on the basis of their development impact rather than more commercially-attractive projects that generate a larger number of Certified Emissions Reductions(CERs). Third, if the Bank is genuinely committed to facilitating private sectormarket development in carbon finance, then we should see the Bank withdrawingfrom CDM projects in developing countries where the CDM market has clearlymatured to the point of attracting private sector participants, observed through theoverall reduction in Bank CDM projects. While the methodology for testing thesehypotheses is contingent upon the reader being sympathetic to data limitations andagreeing with the authors’ definition and scaled measurement of a project’s“development orientation,” the authors’ overall approach is meticulous andpersuasive. Moreover, the results, while nascent, suggest some surprising andsignificant observations, setting up the authors well for outlining an importantresearch agenda and set of policy prescriptions.

On the first hypothesis, the authors find that the Bank is in fact marginally moreinclined to pursue CDM projects in poorer countries than private sector counterparts.However, this is in relative terms only. In absolute terms, the majority of the Bank’sprojects (39 out of 65) are directed towards upper middle income countries, thussomewhat belying the Bank’s claims of being pro-poor in carbon finance. Likewise, thefact that the Bank does not have projects in High Income Countries (HICs) does notvalidate the needs-based hypothesis, as the Bank has no mandate to work in HICs.

More interesting here is the analysis the authors conduct on the subnationalselection bias of Bank CDM projects. On whole, the Bank actually appears lesslikely than the private sector to select CDM projects in the poorest regions withincountries such as China. However, this conclusion is not empirically well supportedbecause of two data challenges (the first of which the authors explicitly recognize).The first concerns the limited number of countries (China, India and Brazil) in which

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they seek to examine subnational trends and the limited number of Bank CDMprojects (19) within these three countries. This is a problem that can easily berectified with further analysis when a larger number of CDM projects are registeredand the authors can conduct a statistical study with a larger number of country cases(that is, when other countries beyond China, India and Brazil gain a critical numberof Bank CDM projects). The second problem has to do with the precision of data onregional or provincial per capita incomes. For example, it would be good to knowwhether or not Bank CDM projects directed at urban areas (which on whole tend tohave higher GDP per capita than rural areas) are in fact less “pro-poor.” One couldeasily imagine, for example, that a Bank CDM project in Nairobi, Kenya would becategorized here as a project benefiting a subnational region with high income percapita. However, if the CDM project was actually targeting an urban slum area, suchas the Kibera district on the edge of Nairobi, its direct beneficiaries would fall intothe low income per capita category and the resulting verdict on the Bank’s pro-poorperformance would be significantly different. Nonetheless, the authors make theirpoint well: we need to pay attention not only to the total number and percentage ofBank CDM projects in lower- and lower-middle income countries, and we also needto stay attuned to where within these countries the CDM projects are directed. More,and better data, will allow us to do just this.

On the second hypothesis regarding the development versus profit orientation ofthe Bank’s CDM projects, the authors find mixed results. The Bank does seem toperform well on the authors’ measure when based upon a calculation of thepercentage of projects focused on activities that have clear positive developmentbenefits (such as composting or landfill power). However, the Bank does not appearto live up to its pro-development goals in terms of the number of its projectsdesignated as “Gold Standard” projects. Thus, it is difficult for the authors toconfirm or disprove the needs-based hypothesis here, although not for lack of effort.A definitive answer to this depends on further analysis that tackles the substantialdebate on how to identify and measure the “development benefits” of a CDMproject, as well as simply more information on project-level activities (see, e.g., theauthor’s own prior discussion of this in Michaelowa and Michaelowa 2010).

Finally, on the third hypothesis on the Bank’s espoused commitment tofacilitating rather than competing against the private sector in carbon markets, theauthors again find mixed and inconclusive results. The Bank does not appear to bereducing its overall number of CDM projects, thus suggesting that the Bank may notbe fulfilling its pledge to exit the market as carbon finance mechanisms mature. Butagain, the findings are inconclusive because of the preliminary nature of theavailable data. A more persuasive analysis would incorporate a longer timer-seriesanalysis with more observations on the national and subnational location of CDMprojects. For example, one might test the Bank’s commitment to “crowding in” theprivate sector not only by analyzing the change in the total number of Bank projects,but also disaggregating this geographically. After all, what we really want to know iswhether the Bank is reducing its presence in mature carbon markets while rampingup its presence in immature carbon markets. The overall number of projects mightactually go up in this scenario, but the behavior would be consistent with the needs-based hypothesis. So again, the task is simply to be patient with this research. It willbe very interesting for the authors to repeat the analysis when more of the Bank’s

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reported 200+ projects are fully registered (as opposed to the 65 under study here)and the time series can be expanded to include projects in 2010 and beyond.

Patience and persistence, however, may not be enough to make this study asinsightful as it could be. Michaelowa and Michaelowa’s argument ultimately muststruggle with the problem of determining motivation or intent from observedbehavior. In other words, they assume the Bank’s intent (needs- or interest-driven)can be inferred from observed patterns in Bank CDM project selection. A betterassessment of the Bank’s true motivations in its carbon finance activities wouldinclude a more varied methodology, including in-depth interviews with the executiveboard and management of the Bank as well as the staff within its Carbon FinanceUnit. It may be the case, after all, that the Bank’s perceived failures to live up to itsprofessed pro-poor, pro-market approach to carbon finance may not have anything todo with malign intent or hypocrisy. Instead, they may have everything to do with thefeasibility of initiating and implementing CDM projects in low income countriesbecause of capacity issues, corruption concerns, or a whole host of other alternativereasons that only those at the frontline of operations will be able to identify.

In sum, Michaelowa and Michaelowa provide a provocative analysis of theBank’s role in carbon finance that will interest IO scholars, activists, andpolicymakers alike. They present a set of clear hypotheses and a defensiblemethodology for observing and evaluating Bank activities in carbon finance markets.This work could—and should—be revisited in the near future as more data becomeavailable. Moreover, while not foolproof, their approach is an excellent example ofpositivist social science research, insofar as they attempt to assess the Bank’srhetorical versus actual behavior in a transparent and replicable manner withoutfalling prey to random anecdotes, biased case selection, or polemic speculation. Assuch, Michaelowa and Michaelowa’s work represents a promising avenue ofresearch through which we can construct rigorous accountability mechanisms andassess the legitimacy of the Bank’s involvement in the complex regime for climatechange (Keohane and Victor 2011) and in the international development aid regime.

References

Friedman, M. (1962). Capitalism and freedom. Chicago: University of Chicago Press.Keohane, R., & Victor, D. (2011). Regime complex for climate change. Perspectives on Politics, 9(1), 5–21.Michaelowa, A., & Michaelowa, K. (2010). Coding error or statistical embellishment? The political

economy of reporting climate aid. CIS Working Papers (56/2010; Zurich: Center for Comparative andInternational Studies (CIS), ETH Zurich and University of Zurich).

Michaelowa, A., & Michaelowa, K. (2011). Climate business for poverty reduction? The role of the WorldBank. Review of International Organizations 6.

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