The planned repo­si­tion­ing of the in­sti­tu­tion and ef­forts to mar­shal pri­vate cap­i­tal will have dis­ad­van­tages for emerg­ing economies

African Independent - - BUSINESS - MISHECK MUTIZE

THE PLANNED rein­ven­tion of the World Bank might be a mea culpa of sorts from the mul­ti­lat­eral fund­ing in­sti­tu­tion, but it is still bad news for poor African coun­tries.

The World Bank is look­ing to mi­grate from the model that largely re­lies on mem­ber states pro­vid­ing loans for de­vel­op­ment projects to one in which it be­comes more of a bro­ker of pri­vate cap­i­tal to be in­vested in de­vel­op­ment projects.

World Bank group pres­i­dent Jim Yong Kim be­lieves a size­able por­tion of pri­vate cap­i­tal lies idle. With proper steps to elim­i­nate un­ac­cept­able risks, this cap­i­tal could be chan­nelled into fund­ing de­vel­op­ment in poor coun­tries.

Pri­vate in­vestors are gen­er­ally risk-averse. This means moun­tains of idle cash re­main largely un­tapped at the ex­pense of real in­vest­ments. These could gen­er­ate jobs and green en­ergy, as well as re­duce poverty, im­prove health care and ex­tin­guish the debt that is haunt­ing coun­tries the world over.

Kim ar­gues de­vel­op­ment fi­nance needs to change fun­da­men­tally in speed and scale, grow­ing from bil­lions of dol­lars in de­vel­op­ment aid to tril­lions in in­vest­ment.

As Felix Stein from the Univer­sity of Cam­bridge and Devi Srid­har from the Univer­sity of Ed­in­burgh point out, Kim now be­lieves there are sig­nif­i­cant fi­nan­cial re­sources read­ily avail­able and sit­ting on the side­lines of cap­i­tal mar­kets.

They gen­er­ate lit­tle in the way of re­turns, par­tic­u­larly com­pared to what they could make if in­vested in de­vel­op­ing coun­tries. Pri­vate in­vestors lack knowl­edge about these coun­tries and their ten­dency to be risk-averse means the funds re­main largely un­tapped.

Kim’s ar­gu­ment amounts to an ad­mis­sion that the Bret­ton Woods sys­tem has failed to ad­dress gaps in the global cap­i­tal mar­kets. It’s also an ad­mit­tance that its in­sti­tu­tions – the In­ter­na­tional Mone­tary Fund and World Bank – which were es­tab­lished af­ter World War II to fos­ter in­ter­na­tional eco­nomic co-op­er­a­tion – have failed to sup­port the world’s de­vel­op­men­tal needs.

How­ever, pri­vate sec­tor fund­ing won’t help the sit­u­a­tion be­cause the much-needed de­vel­op­men­tal in­vest­ments in Africa are so­cial in na­ture. Pri­vate in­vest­ments will also be costly and, as a con­se­quence, ex­ploita­tive.

The Bret­ton Woods mul­ti­lat­eral in­sti­tu­tions have been strongly crit­i­cised for their cor­po­rate-led model, which tends to un­der­mine so­cial jus­tice.

Over the years, they have fo­cused on profit-ori­ented in­vest­ments. Many have im­pov­er­ished people in emerg­ing economies, par­tic­u­larly in Asia and Africa, through dis­place­ments, large-scale pri­vati­sa­tion, the loot­ing of nat­u­ral re­sources and en­vi­ron­men­tal degra­da­tion.

Aid and loans from the World Bank and In­ter­na­tional Mone­tary Fund usu­ally come with strict con­di­tions and re­stric­tive pol­icy rec­om­men­da­tions. These take away the eco­nomic free­dom of aid re­cip­i­ents and bor­row­ing coun­tries. They in­clude strict in­fla­tion con­trols, high tax­a­tion, large-scale pri­vati­sa­tion, rapid trade lib­er­al­i­sa­tion and cut­ting govern­ment ex­pen­di­ture on so­cial ser­vices.

Con­di­tions on aid and loans usu­ally for­feit states’ au­thor­ity in gov­ern­ing their own econ­omy, as na­tional eco­nomic poli­cies are pre­de­ter­mined un­der the loan pack­ages. This ul­ti­mately shifts regulation of na­tional economies from state gov­ern­ments to the Washington in­sti­tu­tion in which African de­vel­op­ing coun­tries hold lit­tle vot­ing power.

The num­ber of emerg­ing coun­tries de­pend­ing on the World Bank fund­ing has dras­ti­cally de­clined over the past 10 years. This has mainly been due to in­creas­ingly at­trac­tive al­ter­na­tive sources of fi­nanc­ing.

The bank has been ren­dered ir­rel­e­vant as pri­vate cap­i­tal flows to the de­vel­op­ing world have grown on the back of gov­ern­ments is­su­ing sov­er­eign bonds. Its role has grad­u­ally become one of an aid agency deal­ing with a smaller group of low-in­come, frag­ile states.

A new gen­er­a­tion of in­sti­tu­tions, spear­headed by emerg­ing mar­ket gov­ern­ments led by China, is fur­ther threat­en­ing the tra­di­tional mul­ti­lat­eral in­sti­tu­tions.

This is what lies be­hind the World Bank’s ef­forts to re­po­si­tion it­self from be­ing a lender for ma­jor de­vel­op­ment projects re­ly­ing on fund­ing states, to a bro­ker for pri­vate sec­tor in­vest­ment. This would shift the in­sti­tu­tion away from be­ing a body that dis­burses de­vel­op­ment aid to one that mo­bilises in­vest­ment.

But the World Bank’s pro­posed repo­si­tion­ing will have a num­ber of neg­a­tive im­pli­ca­tions for coun­tries in Africa.

First, it will fur­ther dis­ad­van­tage de­vel­op­ing na­tions, as most in­vest­ments in Africa are clas­si­fied as risky. This means most in­vestors are un­will­ing to com­mit funds for longer time frames. And, given the high risk as­sess­ment, bor­row­ing will be ex­pen­sive. This, in turn, will push coun­tries fur­ther into debt and ex­pose them to ex­ploita­tion by pri­vate lenders.

Sec­ond, the repo­si­tion­ing from pub­lic to pri­vate fund­ing will fur­ther ce­ment the World Bank’s busi­ness model at the ex­pense of so­cial ben­e­fit. This will un­der­mine the role of the state as the pri­mary provider of es­sen­tial goods and ser­vices, such as health care and ed­u­ca­tion.

Last, it will be al­most im­pos­si­ble for the bank to me­di­ate suc­cess­fully be­tween the in­ter­ests of a global mar­ket sys­tem, de­vel­op­ing coun­try gov­ern­ments and people in liv­ing poverty. This is be­cause projects at­trac­tive for pri­vate in­vest­ment are out of the reach of poor people.

There is no rea­son to be­lieve the bank’s en­vis­aged new role will lead to a re­duc­tion in poverty. The more likely out­come will be that it once again fails to ad­dress in­ter­na­tional cap­i­tal mar­ket short­com­ings. – The Con­ver­sa­tion

Misheck Mutize Lec­turer of fi­nance and Doc­tor of Phi­los­o­phy can­di­date, spe­cial­is­ing in fi­nance, Univer­sity of Cape Town

LOOK­ING TO THE FU­TURE: World Bank pres­i­dent Jim Yong Kim be­lieves a large pro­por­tion of pri­vate cap­i­tal is un­used.

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