|WORLD BANK SPECIAL|
While the World Bank’s lending has been largely depoliticized since the end of the Cold War, the political influence over its governance and shareholder structure has been a topic of heated argument more or less since its foundation.
Today, the US remains by far the largest shareholder in the Bank, with close to 16% of its voting rights, which unsurprisingly raises hackles throughout the non-governmental organization community and elsewhere.
“The selection procedure and governance structure reflect the fact that powerful shareholders have been using the Bank and its financing policies to further their own interest,” says María José Romero, policy and advocacy officer at the European Network on Debt and Development (Eurodad).
This was hard enough to argue with before 2019. It has been even harder since April, when the former Bear Stearns chief economist and US Treasury official David Malpass was appointed as the 13th president of the World Bank.
It was not just that Malpass was appointed unopposed, perpetuating the anachronistic unwritten rule that the World Bank’s president should be an American, with the top job at the IMF next door reserved for a European, it was also that he was nominated by a US president whose isolationist ideology is diametrically opposed to the apolitical multilateralism that is the World Bank’s raison d’être.
And that 11 years before D-Day for the UN’s Sustainable Development Goals (SDGs), he was appointed by an individual who seems to regard climate change as an elaborate hoax.
These objections were raised at the end of February by Lord (Nicholas) Stern, who has been closely connected with the World Bank since the 1970s and who served as its chief economist between 2000 and 2003.
Addressing the House of Lords in London in February, Stern said that: “The perpetuation of the de facto monopoly by the USA and Europe of the positions at the head of the IMF and the World Bank undermines confidence in those institutions and in internationalism.”
This, he suggested, was “surely unacceptable in a world that has changed radically since the founding of those institutions seven decades ago.”
The perpetuation of the de facto monopoly by the USA and Europe of the positions at the head of the IMF and the World Bank undermines confidence in those institutions and in internationalism- Nicholas Stern
Stern added that with the SDGs and the 2015 Paris climate agreement at the core of the World Bank’s agenda: “The absence of commitment to this agenda is a serious weakness in the candidate nominated by the US.”
Perhaps surprisingly, in light of the controversy that engulfed his appointment, Malpass is said to have done a reasonably good job in his first few months. He has also dissociated himself from president Donald Trump’s views on the environment, very publicly reaffirming the Bank’s commitment to mobilizing some $200 billion by 2025 under its Climate Change Action Plan.
His track record to date even leads some to welcome the Malpass appointment on the basis of faute de mieux.
“Given that Trump was apparently serious about nominating Ivanka as Kim’s successor, I think there may have been some relief when he opted for Malpass instead,” says one former World Bank director. “I’m told [Malpass] has fitted in quite nicely.”
Unfit for purpose
Nevertheless, given its record on picking its presidents and allocating its voting rights, it is small wonder that the World Bank (along with the IMF) has been described by critics as unfit for purpose.
One such is former Nigerian finance minister Ngozi Okonjo-Iweala, who is said by many to have been the best president the World Bank never had. When the opportunity arose for developing countries to nominate candidates to contest the race for the leadership of the Bank in 2012, Okonjo-Iweala’s name was put forward by several African heads of state.
Nobody was more surprised at her nomination than Okonjo-Iweala herself.
“When I returned to Nigeria as finance minister in 2011, it did not cross my mind that I would run for World Bank president,” she tells Euromoney. “It was only when I was told that the Bank was planning to recruit its next president on merit that I agreed to stand.”
It was unsurprising that African leaders such as the presidents of Benin, Liberia and Côte d’Ivoire were eager to see Okonjo-Iweala appointed as the Bank’s first non-American president. It was less predictable that she would also win the enthusiastic backing of 39 former senior World Bank officials.
They signed an open letter to the Bank’s board arguing that she had “outstanding qualifications across the full range of relevant criteria” for the post.
Outstanding indeed, because aside from holding the wrong passport, it was hard to see which boxes the Harvard-educated Okonjo-Iweala failed to tick. As well as having spent more than two decades at the Bank as a development economist, Okonjo-Iweala had served twice as Nigeria’s finance minister. She also had a short spell as its foreign minister in 2006, meaning that her CV was strengthened by diplomatic as well as financial credentials.
“In a word,” the letter from the 39 experts supporting Okonjo-Iweala’s candidature said, “she would be the outstanding World Bank president the times call for.”
Neither this track record nor the expectation of the 39 signatories that Okonjo-Iweala would “hit the ground running”, were enough to persuade the Bank’s largest shareholders to lend her their support.
Their reluctance to break with tradition had already been anticipated by the other candidate from the developing world, former Colombian finance minister José Antonio Ocampo. When he withdrew his candidature, he said that the process had neither been merit-based nor transparent.
Isn’t it ironic that the World Bank, which preaches gender equality throughout the world, has never allowed a woman to run it?- Ngozi Okonjo-Iweala
Okonjo-Iweala was quoted at Davos in 2017 as saying that both the leadership and ownership of the World Bank were “anomalous”.
“You cannot have a situation where smaller European countries have a greater share in, say, the World Bank or the IMF than China or India,” she said.
The numbers speak for themselves. Admittedly, China’s share of the World Bank’s voting power was recently increased to 5.71%, making it the third-largest shareholder behind the US (with 15.87%) and Japan (6.83%). But China’s voting influence remains out of kilter with its share of the global economy, which based on purchasing power parity was close to 19% in 2018.
When the Bank’s weightiest shareholders favoured Jim Yong Kim as its new president over Okonjo-Iweala, it was not just the opportunity to pick a former finance minister representing the developing world that they missed. They also passed up a golden opportunity to appoint a woman to lead the Bank for the first time.
“Isn’t it ironic that the World Bank, which preaches gender equality throughout the world, has never allowed a woman to run it?” asks Okonjo-Iweala rhetorically.
It is a valid point. Aside from Okonjo-Iweala, accomplished women such as Jessica Einhorn, Anne Krueger, Afsaneh Beschloss and Dame Minouche Shafik have all held very senior posts at the Bank. More recently, the Bulgarian economist, Kristalina Georgieva even put a hairline fracture in the Bank’s glass ceiling when she was appointed chief executive in January 2017 and subsequently as interim president following the departure of Kim.
But as Okonjo-Iweala says, no woman has yet climbed to the very top of the World Bank.
Like so many of its former directors, Okonjo-Iweala talks fondly but ambivalently about the Bank – much as a parent might speak about a beloved but wayward child.
“I still believe in the Bank,” she says. “For all its flaws, I love it. But many people question whether the governance process has not gone backwards since 2012. How can the Bank preach to countries around the world about appointing people to lead its institutions on merit when it does not follow its own advice when it comes to its own governance?”
Other former World Bank directors share the view that its ownership structure makes little sense.
“Some of the shareholders’ voting rights were decided when Belgium was bigger than Brazil,” says one. “That has to change, because it is becoming difficult for the World Bank to present itself as a genuinely multilateral institution when voting rights reflect relative GDP levels of 30 or 40 years ago.”
Against this backdrop, a handful of the countries that once doffed their caps to the World Bank in search of money and advice are now establishing multilateral development banks (MDBs) of their own. These newcomers are fast accumulating the necessary capital, self-confidence and expertise to compete head-on with the World Bank.
The most visible is the Asian Infrastructure Investment Bank (AIIB), the establishment of which was at least partially motivated by frustration at the influence wielded over the World Bank by the US and over the IMF by the Europeans.
“Because they’re not being given commensurate ownership of the Bank, emerging countries are giving up and saying: ‘We’ll create our own institutions instead,’” says Okonjo-Iweala.
This is corroborated by NGOs like Eurodad.
“New institutions such as the AIIB and the Brics’ New Development Bank are a political response to the discontent of emerging countries with the lack of representation and the slow pace of governance reform at the World Bank,” says Romero.
This is not to say that she welcomes the newcomers with open arms, arguing that the financial model of these institutions replicates that of the old ones, which Eurodad believes puts too much emphasis on crowding in the private sector.
It is important to keep the evolution of this new competitive landscape in perspective. Stern describes the World Bank and the IMF as having been “weakened rather than destroyed” by the backlash over their governance.
“It does not help their cause, but both are sufficiently strong to ride it out and retain their effectiveness,” he says.
In any case, as World Bank treasurer Jingdong Hua and others point out, the global infrastructure financing gap is such that if newcomers such as the AIIB and other Asia-based MDBs bring new finance to the party, all power to their elbows.
Beyond the added urge it will bring to development finance, competition from an increasingly deep-pocketed and ambitious AIIB may be no bad thing if it helps to update standards across the global MDB sector. This is because the AIIB has been careful to study the World Bank precedent and to learn from its mistakes and weaknesses – often by enlisting the help of World Bank alumni.
One of these is David Dollar, who has acted as a consultant to the AIIB. He believes that the one of the most important influences on the evolution of the AIIB’s business model was the high-level commission on World Bank reform led in 2009 by former Mexican president Ernesto Zedillo, which exposed a number of shortcomings in the institution’s governance.
Dollar says that in formulating its governance structure, the AIIB took note of the Zedillo Report’s observation that the World Bank’s resident board required to approve all loans was an expensive anachronism costing in the region of $80 million a year. By contrast, AIIB’s board serves on a part-time, non-resident basis.
Another detail in the Zedillo Report unlikely to have escaped the attention of the AIIB and other new MDBs was its argument that the World Bank has become excessively risk-averse in some of the standards it applies to project lending. The consequence is that the implementation of these policies can be impossibly burdensome and time-consuming for the borrower countries they are supposed to be helping.
A by-product of this, says Dollar, is that the AIIB is likely to have a stronger appetite for risk than the World Bank, which will inevitably appeal to some borrowers. Equally appealing will be the streamlined and less bureaucratic loan approval procedure that will reduce costs and, hopefully, put pressure on the World Bank to cut some of its red tape.
Diminution of influence
It is not just the governance structure of the World Bank that has been questioned in recent years; so too has its relative size, the decline in which since the end of the Cold War is undeniable. The diminution of its influence was put into historical context in a recent panel discussion by former World Bank and IMF director Shafik, who served as deputy governor of the Bank of England between 2014 and 2017.
When she joined the World Bank in 1990, becoming its youngest-ever vice-president at the age of 36, it had what she called a “virtual monopoly” on financing and knowledge transfer to developing countries.
“That is so far from the current reality as to be unimaginable,” says Shafik, who is now a director at the London School of Economics (LSE).
Pedro Alba, who spent 32 years at the Bank between 1984 and 2016, says: “The Bank’s relative size has declined because the way in which developing countries are financed has changed radically over the last 20 years.”
This process, he adds, gained visible and irreversible momentum in the 1990s when flows of private capital to developing economies skyrocketed.
Attracted by political change and vibrant economic growth in emerging markets, private investment flows to developing countries more than tripled, from $44 billion in 1990 to nearly $170 billion at the end of 1995. The result, said former president James Wolfensohn in an interview in 1995, was that the Bank had become “a minor source of capital”.
The extent to which the World Bank has shrunk in relative terms as emerging economies have grown came home to former World Bank CFO Bertrand Badré on a visit to China in 2013, as he recounts in his book ‘Can finance save the world?’ published in 2018.
Badré recalls how the deputy governor of Fujian Province told him at an official banquet in Xiamen that if the World Bank were Chinese, it would be the 10th largest bank in the country. That was a few years ago. Now, with a touch over $400 billion in assets, the World Bank would be the 14th largest in China, while in global rankings it would sit somewhere between Banco do Brasil and Korea’s Shinhan Group.
In recent years the group has been pushing out between $60 billion and $70 billion a year, which in a world with GDP of $100 trillion is virtually nothing- Bertrand Badré
Badré puts this size into context, saying that the balance sheet of the World Bank is five times smaller than Société Générale and six or seven times smaller than Crédit Agricole.
“In recent years the group has been pushing out between $60 billion and $70 billion a year, which in a world with GDP of $100 trillion is virtually nothing,” he says.
The World Bank’s shareholders appear to agree, which is why at the spring meeting in 2018 they sanctioned a $13 billion increase in its paid-in capital: $7.5 billion for the International Bank for Reconstruction and Development (IBRD) and $5.5 billion for the International Development Association (IDA).
Described by the Bank as transformative, this move will help boost its total lending capacity to an annual average of close to $100 billion by 2030, compared with a total of just under $67 billion in 2018.
How much the relatively modest size of the World Bank matters is open to question. Stern argues that the power of leverage from paid-in to total capital could and should greatly bolster the financing capacity both of the World Bank and other multilaterals. Throw in co-financing from the private sector and Stern believes that billions can indeed be turned into the trillions that the Bank says are needed to deliver the SDGs.
“I don’t see the multilateral lending institutions as gap-fillers,” he says. “I see them using their capital structure to take risks that others can’t take. That’s their role. That’s their duty.”
At the Center for Global Development (CGD) in Washington, senior policy fellow Nancy Lee agrees that MDBs should be encouraged to take on more risk, but adds that this in turn may call for a change in their fundamental business models.
Nancy Lee, Center for Global Development
“This probably means the product mix needs to move away from the current heavy focus on lending,” she explains. “It should move towards more catalytic mechanisms like equity and early stage financing, where the risks are more concentrated.”
This all sounds good, but the reference to heightened risk-taking at the World Bank may unnerve those who fret about the long-term sustainability of the institution’s triple-A rating. This may be taken for granted today, but it is the life-blood that the Bank’s treasurers have fought so hard to secure and maintain.
The majority view appears to be that concerns about the rating are misplaced, given the very large cushion of the Bank’s callable capital, together with various other mechanisms that could be explored in order to safeguard the rating.
Badré, for example, has recommended a cross-guarantee scheme as a way of addressing concentration risk among MDBs, which he says poses the greatest threat to their triple-A ratings.
“As MDBs share the same objectives and the same shareholders, why not also share risk?” he says. “I’m not suggesting that the AfDB should lend to Brazil, or that the IADB [Inter-American Development Bank] should lend to Nigeria, but that if one of those countries defaults, the risk could be spread across the global MDB system.”
Lee agrees that more effective cooperation among MDBs is essential if the risks associated with generating the finance necessary to meet the SDGs are to be managed efficiently.
“What is really important is not just that these institutions are willing and able to take on some of the risk that the private sector is unprepared to bear,” she says. “It is also essential that by working together they mitigate the risk and therefore greatly enhance the viability of projects that would otherwise be unbankable.”
Increased cooperation between MDBs is also at the heart of recommendations put forward in the Report of the G20 Eminent Persons Group on Global Financial Governance, chaired by Singapore’s deputy prime minister, Tharman Shanmugaratnam.
“We’ve said in this report that the MDBs don’t deliver effectively as a system,” says Okonjo-Iweala, a contributor to the report. “They deliver individually, which means that the sums are less than the parts.”
Stern, meanwhile, is relaxed about any threat to the World Bank’s triple-A rating arising from elevated risk tolerance.
“I agree that the rating is linked to the Bank’s loan portfolio, but first and foremost the rating depends on its owners and shareholders,” he insists. “The last thing they’re going to default on is their obligations to the World Bank and the IMF.”
Redefining its role
Nevertheless, some believe that if the World Bank is to retain its relevance over the coming decades, it may need to redefine its role, in part to safeguard itself against the mission creep that has perhaps spread its resources too thinly in the past.
Masood Ahmed at the CGD in Washington says that this should be upheld as a practical necessity rather than an ideological objective.
The greatest risk to the World Bank is that it spends a lot of time, energy and resources on projects that are perfectly commendable but which could equally well be done by others- Masood Ahmed
“The greatest risk to the World Bank is that it spends a lot of time, energy and resources on projects that are perfectly commendable but which could equally well be done by others,” he says.
One defence against this risk would be for the Bank to focus more narrowly, and possibly even exclusively, on so-called global public goods, which were described earlier this year by Shafik as probably the only “unique comparative advantage” the World Bank has left.
Masood Ahmed, Center for Global Development
These address challenges that respect no national frontiers. Climate change is an obvious example, given that emissions don’t carry passports. Pandemics, which are estimated to cost the world $570 billion a year, or 0.7% of global GDP, are another. National security and the challenges generated by fragile states and refugee crises are a third and more nuanced example.
Stern believes the discussion about global public goods has been over-egged.
“Fighting poverty and fostering sustainability through investment in infrastructure, schools, health systems and the environment in individual countries, regions and cities are core to what the World Bank does,” he says. “It is a very serious mistake to slice public goods away from that country-specific investment.”
Perhaps, but there seems to be some compelling logic underlying the idea of encouraging the World Bank to concentrate on global threats while regionally focused MDBs take the lead on more localized projects.
“In order to make projects work more effectively, we need more local knowledge,” says Okonjo-Iweala.
Another suggestion for a way in which the World Bank Group’s remit could be more narrowly focused would be for the institution’s lending to become IDA-led. In other words, with countries such as China and India, which historically leaned very heavily on IBRD finance, now able to generate sufficient private sector funding to support their development, why not focus purely on long-term concessional financing for the very poor, which is IDA’s sphere of influence?
There are plenty of reasons why this suggestion has been dismissed in the past and should be rejected in the future, say its disparagers.
Former treasurer Eugene Rotberg says that the explosion in private capital flows to emerging market economies led some to question the World Bank’s relevance in the 1990s. The answer he and others gave was that foreign direct investment was unlikely to be channelled into some of the areas where it would be most needed, even in the most creditworthy developing nations.
They [richer developing nations such as Brazil, India and South Africa] gave way on the funding side because they recognized they could raise cheaper money elsewhere- Mark Malloch-Brown
Nor would it flow to emerging economies in response to natural disasters. Additionally, it could dry up very quickly in periods of global economic stress, as the most recent financial crisis amply demonstrated.
Perhaps most important, say Rotberg and others, is that private finance can never substitute for the technical expertise that the World Bank has traditionally provided.
Lord (Mark) Malloch-Brown, who became administrator of the United Nations Development Programme (UNDP) when he left the World Bank in 1999, says that he was put under pressure to transition the UNDP towards an IDA-style institution exclusively supporting very poor countries. The proposal was met with considerable resistance from richer developing nations such as Brazil, India and South Africa.
“They gave way on the funding side because they recognized they could raise cheaper money elsewhere,” says Malloch-Brown. “But they wouldn’t agree on the technical assistance side.”
Besides, is the IDA model what low-income countries need over the long term?
Charles Boamah, senior vice-president at the AfDB, is not so sure. He says that while there are plenty of countries that need IDA support to pull them to the next level of development, many others need to guard against the element of moral hazard that can go with grant-like finance.
“More needs to be done to mobilize domestic resources to help these countries break free of grant dependency,” he says.