The World Bank reaches a crossroads

The World Bank has a new president to guide it through taxing times, but can this pillar of the international financial system adapt to an era of rapid geopolitical changes and rising nationalism?

The World Bank's headquarters in Washington DC. David Malpass' appointment as president marks a new era for the World Bank Group and its five subsidiaries  

In his first interview as the new president of the World Bank, David Malpass tried to strike a conciliatory tone, alleviating concerns over his previously polemical attitude. And yet, he couldn’t resist making remarks that in different times would cause uproar. He told CNBC: “There are challenges facing the world in terms of how you have transparent projects that are high quality [and] where the debt is transparent. China moved so fast that in some parts of the world, there is just too much debt.”

It was because of comments like these that consternation was expressed across the international development community when Malpass was elected president of the bank in April. Similarly to other Donald Trump appointees, the former chief economist of Bear Stearns holds a deep distrust of the organisation he leads: as undersecretary of the Treasury’s Office of International Affairs, he expressed doubts over the relevance of multilateral institutions, stating that “globalism and multilateralism have gone substantially too far, to the point that they are hurting US and global growth”. Christopher Kilby, a professor of economics and an expert in development aid at Villanova University, told World Finance: “Growth alone is the wrong metric to assess the merits of an organisation like the World Bank. If Malpass does take this as the sole objective, his agenda will be very different from that of previous World Bank presidents – and from the major European stakeholders.”

A divergence of objectives between the US and European stakeholders will make the new president’s work more difficult, according to Kilby. “That is likely to accelerate a trend towards special purpose ‘trust funds’ at the World Bank, where individual donors give funds for specific purposes rather than contributing to the general budget,” he told World Finance. “This tends to undermine multilateralism, in the sense of shared decision-making, and also makes administration more difficult. Overall, funding levels might not change that much, but the leadership role of the World Bank is likely to suffer.”

Although the World Bank president is not responsible for everyday operations, critics claim that the narrow selection process sends a message about the bank’s priorities

A new path
The appointment of Malpass marks a new era for the World Bank Group and its five subsidiaries – the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes. As a group, this international financial institution underwrites loans to developing and middle-income countries, and is an integral part of the Bretton Woods system, which was set up by the victors of the Second World War to monitor the global financial system and intervene when necessary. With a firm critic of multilateralism at the helm of the World Bank, the basic tenets of the system are at risk of falling prey to the wave of populism dominating domestic politics on both sides of the Atlantic. “A smaller World Bank is in line with the anti-globalist point of view,” Kilby said.

Malpass is not alone in his criticism of the system: many US officials who espouse the ‘America first’ doctrine oppose engagement with multilateral organisations. Mark Sobel, US chairman of the think tank OMFIF and former US representative at the IMF, told World Finance: “The US now has a choice – to turn its back on the international financial institutions and not recognise the changing landscape, or to accept the reality of change and work to modernise them. The former path will lead to greater regionalism, [will cause] emerging markets [to drift] away from the multilateral system, and [will] ultimately hurt US interests.”

During his first days at the helm of the World Bank, Malpass tried to address concerns over his agenda, claiming that his past criticism focused on problems that have been solved by the bank’s previous leadership. Optimists also point to his credentials as a pragmatist who knows when to compromise. For example, as a US Treasury official, Malpass participated in talks that concluded in a surprising $13bn capital increase for the bank in exchange for reforms in recruitment and policy.

His predecessor, Jim Yong Kim, was equally controversial. An Obama appointee, Kim spearheaded an unpopular and eventually botched internal reorganisation of the bank that aimed to reduce red tape and curb costs. In an unprecedented move, the World Bank’s staff association demanded an international search for a new president in 2016, but Kim easily won a second five-year term. When he abruptly resigned in January 2019, a considerable portion of the international development community breathed a sigh of relief. Kim’s unpopularity makes the current president’s job easier, said a former World Bank official: “He has the added advantages of having generated relatively low expectations of any drastic change, and of following a president who launched a messy and still incomplete and painful reorganisation, so he will want to settle staff rather than shake up on balance.”

A game of thrones
If the ideological armour of the new president has come under scrutiny, the selection process that led to his appointment is even more controversial: Malpass ran without facing any competition as a result of an informal gentlemen’s agreement between the US and European stakeholders that dates back to the 1950s. According to this, the IMF managing director must always be European, while the World Bank president is an American. Former World Bank senior officials Joseph Stiglitz, François Bourguignon and Nicholas Stern argued in a 2012 Financial Times op-ed that the agreement is “not only hypocritical, it also destroys the trust and spirit of collaboration needed to manage the profound problems facing the world”. The appointment of presidents with questionable credentials – such as Paul Wolfowitz, one of the neo-conservative architects of the Iraq War, and Kim, a public health expert with little experience of international development – has given impetus to voices calling for the end of the arrangement.

When Kim resigned last January, more than 150 non-governmental organisations and academics urged the bank’s board to honour its commitment to an “open, transparent and merit-based” process. Many expressed hope that this election would be different when Lebanon nominated Ziad Hayek as a candidate in February. However, Hayek soon withdrew, with the Lebanese Government citing pressure from other governments as the reason. For his part, Malpass defended the legitimacy of his election: “I feel like there was a long, open and transparent process.”

One way for the World Bank to stay relevant in the 21st century is to broaden its agenda, particularly by focusing on global problems such as financial inclusion, biodiversity, pandemics and refugee crises

Ironically enough, the arrangement contradicts the bank’s own calls for good governance, representation and diversity in the developing world. In 2018, the bank launched its $12m Open Governance Partnership Multi-Donor Trust Fund, aiming “to increase government transparency, improve accountability, and strengthen citizen engagement as well as government responsiveness”. Scott Morris, a senior fellow at the US think tank Centre for Global Development, said: “Nobody can think it was a sign of progress that the US candidate for World Bank president had no challengers. This was largely a failure on the part of European governments, who made it clear enough that they weren’t interested in a competitive election at the World Bank – both because they didn’t want to directly challenge an unpredictable and belligerent White House, but also because they continue to want to protect their ability to pick the IMF managing director.”

Complaints about the president’s nationality are a thin disguise for a more important issue: how the bank is run. Many international development experts believe that borrowing countries should be leading the design and implementation of World Bank programmes. Although the president is not responsible for everyday operations, critics claim that the narrow selection process sends a message about the bank’s priorities. Frustration with this imbalance of power has pushed developing countries – such as the g7+ group of fragile states – to seek alternative solutions.

The power struggle within the ranks of the World Bank is reflected in the institution’s decision-making procedures. Currently, countries with around 12 percent of the world’s population hold 50 percent of the votes. Many developing countries are willing to contribute more capital, but the US has repeatedly blocked such moves to maintain its 17 percent shareholding and veto power. The veto itself is limited, since the US cannot block any projects, but its importance should not be understated, Morris said: “The US won’t allow itself to be diluted below the 15 percent threshold and is unlikely even to inch closer to that threshold. The veto does protect the ability of the US to stand in the way of any major changes at the institution – those that would require a change to the bank’s articles of agreement. Protecting the veto does create a problem for raising capital in the institution.”

Some hope that China could be a counterweight to American influence. Kilby told World Finance: “It seems likely that China earns some influence at the World Bank by being a great customer. However, this influence has clearly been far less than US influence. As an institution with one very influential member (the US), World Bank management would actually benefit from having a counterweight. So the World Bank doesn’t yet run the risk of being captured by China, but World Bank management might be able to use China as a counterweight to US influence.”

The China syndrome
When the World Bank was established, its mission was relatively neutral: reduce poverty by lending to developing nations. The picture has dramatically changed over the past few decades, as some of the biggest loan recipients have achieved high levels of growth and often compete directly with developed ones. Many experts express doubts over whether the group should keep lending to middle-income countries, such as China (see Fig 1). David Dollar, former World Bank official, US Treasury emissary to China and currently a senior fellow at the Brookings Institution, said: “The poorest countries should be the focus, but if the bank stops helping middle-income countries then it is no longer a global development institution.”

Despite its recent economic development, China is still one of the bank’s biggest loan recipients and is currently at the heart of this debate. Sobel said: “Critics are right to point to China’s growing income and huge reserve stockpile as reasons to ask if the bank should be lending to China. Surely, sustaining lending to China to support the bank’s income and balance sheet would be an inappropriate use of resources.” One of the harshest critics of the bank’s engagement with China is its current president: during a congressional testimony in November 2018, Malpass claimed that multilateral development banks are vulnerable to China’s geopolitical influence. More recently, he pushed for the World Bank to cut its lending to other BRICS countries, such as Brazil and China. After his appointment, Malpass confirmed that lending to China will be reduced according to the terms of the US-led $13bn capital increase.

However, reducing lending to China may not be the best option for the World Bank, or even for US taxpayers. According to Kilby, Malpass – and the Trump administration more generally – has called for a dramatic cut in World Bank lending to middle-income countries, especially China. Kilby said: “If this happens, ‘profits’ from IBRD loans [to middle-income countries] will shrink. To continue to make zero-interest loans to very poor countries, the World Bank would have to push donors like the US to increase their contributions. So this aspect of the policies advocated by Malpass will cost US taxpayers – or will force the World Bank to dramatically reduce the aid it gives to poor countries.”

Most controversial of all is the bank’s involvement in China’s ambitious Belt and Road Initiative, a development strategy including infrastructure investment that, according to many analysts, aims to consolidate the country’s geopolitical clout in Asia and beyond. Despite calls to boycott the project, the World Bank engaged with China to ensure its sustainability. Dollar said: “China’s Belt and Road Initiative is financing infrastructure in many core clients of the World Bank. If the bank does not coordinate with these activities, then there will be disjointed projects and financing, and poor outcomes for developing countries. Developing countries do not want to choose between working with China and working with US-dominated institutions such as the [World Bank].”

New players
Another potential source of concern for the bank is the rise of alternative multilateral development banks. Examples include the China-led Asian Infrastructure Investment Bank (AIIB) and the New Development Bank, which was established by the BRICS countries. Dollar said: “The emergence of new development banks provides healthy competition for the World Bank. The new banks have majority ownership by developing countries so their policies are likely to reflect the preferences of those countries. It will be a challenge for the World Bank to remain relevant while still satisfying its owners, [which] are mostly rich countries.” Their activity may benefit the World Bank in the long term, a former World Bank official told World Finance: “‘Cherry-picking’ by the likes of the AIIB of relatively easy and rewarding project finance in a booming region would tend to push the World Bank into doing some harder things, such as funding more complex regional and global public goods, but that evolution is not a bad thing.”

Although World Bank lending peaked at a record $64bn in 2018 (see Fig 2), in relative terms it is decreasing for most developing countries, as these nations increasingly have access to other sources of finance, such as bond markets and Chinese overseas lending. Bilateral lending by China through state-owned companies and banks is, according to some estimates, several times bigger than World Bank loans. But it’s not just loans that developing countries are interested in, Morris said: “Perhaps the surprising result of all this is that the World Bank is still clearly in demand. We might expect that countries would have lost interest in the bank by now, given other options. But demand for World Bank lending has never been higher. Countries, including large-economy countries like China, clearly value their engagement with the bank and are eager to continue borrowing to tap [into World Bank] expertise, even if they don’t ‘need’ the money.”

The World Bank is involved in China’s Belt and Road Initiative, a controversial development strategy that aims to consolidate the country’s geopolitical clout in Asia and beyond

A modern agenda
One way for the bank to stay relevant in the 21st century is to broaden its agenda, particularly by focusing on global problems such as financial inclusion, biodiversity, pandemics and refugee crises. Many experts have called for the bank to take a more active role in the integration of services into global markets – particularly financial markets through capital market development and regulation.

Through its financial inclusion programmes, the bank aims to reduce the number of people without access to financial services. According to the bank’s Global Findex database, there were 1.7 billion adults in the world without a bank account of any type in 2017, with nearly half of these people living in just seven countries (see Fig 3). Critics say the bank can do more to address this issue. Morris noted: “I think development of domestic capital markets and deepening access to external markets ought to remain a high priority for the institution. But it’s a tough agenda, and it’s not clear the bank has a hugely successful track record.”

Climate change is gradually becoming a top priority for the World Bank, but its room for action is constrained due to the lack of a broader political consensus and, more recently, the dogged resistance of the US. The institution also lacks a cohesive approach to climate finance, according to Kilby: “The trend towards more special purpose trust funds managed by the World Bank is likely to continue. With active US opposition, much of the World Bank’s climate change activity may be confined to operations funded from these sources. That points to a piecemeal approach rather than broad policies. This would be unfortunate and inefficient.”

In the past, Malpass has criticised the bank’s emphasis on climate finance and was a key player in pulling the US back from climate finance agreements. However, in his first days at the helm of the institution, he acknowledged that climate change is a “key problem” facing the world and confirmed that it will be a priority for the bank. This reflects the view of the US Government, Morris said: “As bad as the Trump administration has been on climate change generally, it has tended to look the other way when it comes to the World Bank’s climate agenda. The White House’s worst tendencies on multilateralism tend to be focused on the UN, so the UN-led climate agenda will continue to be difficult to carry forward with the US playing an obstructionist role. But these dynamics also suggest that the World Bank can more quietly make significant progress on the agenda outside the limelight.”