Bank chief’s exit il­lus­trates fail­ure to right a ship that has lost its way

Sunday Times - - Business Opinion & Bits - Ron Derby is on leave by Mi­hir Sharma

For the head of the World Bank to quit un­ex­pect­edly would have been big news un­der any cir­cum­stances. But the rea­son out­go­ing pres­i­dent Jim Yong Kim gave for his res­ig­na­tion on Mon­day is even more re­veal­ing. Kim said he was leav­ing the world’s most in­flu­en­tial de­vel­op­ment and in­fra­struc­ture-build­ing agency to join a pri­vate-sec­tor in­fra­struc­ture in­vest­ment fund be­cause he be­lieved “this is the path through which I will be able to make the largest im­pact on ma­jor global is­sues like cli­mate change and the in­fra­struc­ture deficit in emerg­ing mar­kets”. One can hardly imag­ine a more po­tent in­dict­ment of the World Bank’s role in the de­vel­op­ing world than hav­ing its head vote with his feet.

The truth is that Kim isn’t wrong. The World Bank has sim­ply not been ef­fec­tive enough at what is sup­posed to be its core task: mo­bil­is­ing funds for in­fra­struc­ture in­vest­ment in poorer coun­tries.

The fi­nan­cial gap that emerg­ing mar­kets have to bridge is huge; be­tween $1-tril­lion and $1.5-tril­lion (R13-tril­lion and R20-tril­lion) an­nu­ally is needed for in­vest­ment in in­fra­struc­ture. And how much can mul­ti­lat­eral de­vel­op­ment banks raise in to­tal? All of them to­gether — not just the World Bank but also re­gional mul­ti­lat­eral de­vel­op­ment banks such as the Asian

De­vel­op­ment Bank — can spend about $116bn a year, of which $45bn goes into in­fra­struc­ture in­vest­ment.

Now, one re­sponse to this prob­lem could be to cap­i­talise these banks bet­ter. But, as we’re likely to dis­cover in the bat­tle be­tween the Trump ad­min­is­tra­tion and the rest of the world that is now in­evitable af­ter

Kim’s res­ig­na­tion, the US isn’t ter­ri­bly in­ter­ested in mul­ti­lat­eral in­sti­tu­tions such as the World Bank. (This is a strik­ing con­trast to China, which is look­ing to scale up the in­sti­tu­tions it dom­i­nates.)

So where will the rest of the money have to come from? Well, from our pock­ets, that’s where. It’s savers across the world whose money will need to be sent over­seas to where it can best be put to work — in the de­vel­op­ing world. Pri­vate fi­nance will have to step in and put just a frac­tion of the $90-plus tril­lion of rich-coun­try sav­ings into emerg­ing-mar­ket in­fra­struc­ture.

This is where the World Bank has fallen short. Back when it was set up, in the 1940s, the bank was sup­posed to work closely with the pri­vate sec­tor, not to make grants or loans of its own money.

Henry Mor­gen­thau, the US Trea­sury sec­re­tary back when the Bret­ton Woods in­sti­tu­tions were be­ing de­signed, was pretty clear about the bank’s role: “The pri­mary aim of such an agency should be to en­cour­age pri­vate cap­i­tal to go abroad for pro­duc­tive in­vest­ment by shar­ing the risks of pri­vate in­vestors in large ven­tures … The most im­por­tant of the bank’s op­er­a­tions will be to guar­an­tee loans in or­der that in­vestors may have a rea­son­able as­sur­ance of safety in plac­ing their funds abroad.”

That isn’t how things panned out. In fact, in 2013, less than 2% of the to­tal funds mo­bilised by all de­vel­op­ment fi­nance in­sti­tu­tions took the form of loan guar­an­tees.

In­stead of work­ing with the pri­vate sec­tor, the World Bank has be­come a slack, bloated, pub­lic-sec­tor bu­reau­cracy that sur­vives by flat­ter­ing its host gov­ern­ments and play­ing it safe with donors. Most of its lend­ing is di­rect to gov­ern­ments. That is great for all con­cerned: the bank’s staff mon­i­tor the lend­ing process; most need min­i­mal spe­cial­ist skills. Donor gov­ern­ments use the bank as a tool of for­eign pol­icy, and re­cip­i­ent gov­ern­ments con­trol where the cash goes — fre­quently their own state-owned com­pa­nies.

There have been ef­forts to change this lazy equi­lib­rium in re­cent years. Since early in Kim’s term, the World Bank and other mul­ti­lat­eral de­vel­op­ment agen­cies have at­tempted to de-pri­ori­tise con­ces­sional loans as an in­stru­ment and raise the pro­file of guar­an­tees. Kim’s pre­ma­ture de­par­ture, though, tells us all we need to know about how suc­cess­ful that ef­fort has been. — Bloomberg

The World Bank has sim­ply not been ef­fec­tive enough

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