WASHINGTON — Just before 5 p.m. EST on Saturday, the World Bank issued a press release that President Jim Yong Kim has hoped to send for a long time.
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After months of negotiations — including with a skeptical Trump administration — Kim was able to announce a $13 billion capital increase that will allow the bank to lend more money and finance more projects. The capital increase deal dominated this year’s Spring Meetings, and it came with a package of financial and policy reforms that will continue to fuel discussions about the bank’s evolving role. The meetings also showcased efforts to drive investment in health and education, and to harness technological disruption for economic benefits in developing countries.
1. More money for more problems
Kim has argued that as the bank’s shareholders have asked it to play a central role in some of the world’s most pressing challenges — climate change, support for refugee hosting countries, fragile states — they must also help the institution scale up its financial resources accordingly.
The capital increase deal, agreed by the bank’s governors and announced during the meeting of the Development Committee on Saturday, includes $7.5 billion of additional shareholder capital for the International Bank for Reconstruction and Development, the branch of the bank that makes loans to middle-income countries, and another $5.5 billion for the International Finance Corp., the bank’s private sector arm.
The “Sustainable Financing for Sustainable Development” report, which describes the financial and policy commitments that accompany this deal, outlines how different branches of the bank will dedicate more of their financing to projects related to climate change.
Much of the debate leading up to the agreement focused on how IBRD allocates its lending between countries at the higher and lower ends of the middle-income bracket. The Trump administration has taken issue with World Bank lending to China in particular, arguing that the country can secure financing on its own from other sources. This agreement stops short of any direct prohibition on lending to specific countries, as Kim noted in his press conference.
“There's nothing in the agreement that we've put together and presented to the governors that remarks on any single country's borrowing,” he told reporters on Thursday.
The agreement does include a commitment to direct 70 percent of IBRD’s lending to lower-middle-income countries — an amount not much different from the bank’s historic lending patterns, Scott Morris, a senior fellow at the Center for Global Development, pointed out. China’s shareholding at the World Bank is poised to increase by more than a percentage point.
In his statement to the committee Mnuchin remarked, “with increased shareholding rights come increased responsibilities.”
2. The strings attached
For the bank, $13 billion does not come for free.
The capital increase includes both financial and policy agreements, which have been hashed out behind closed doors by bank leaders, country representatives, and other key development players. The bank’s owners have agreed that it should undergo reforms at the same time it absorbs additional spending power. In the agreed proposal, these fall under the category of “efficiency measures.”
As negotiations for a multibillion dollar capital increase at the World Bank continue this week, the United States government wants to see employees' salary growth curtailed, according to a source with knowledge of the U.S. position.
As Devex reported, one of those efficiency measures includes a look at World Bank salaries — and the rate at which they grow every year. The Trump administration has made clear it thinks World Bank salaries are “too generous,” a view reiterated in Treasury Secretary Steven Mnuchin’s statement to the Development Committee on Saturday.
“I appreciate that the Bank has agreed to contain wage growth through a cap, which has been growing at levels above what our taxpayers themselves earn and are willing to tolerate at a public institution,” he wrote.
The sustainable financing report alludes to a number of other measures the bank could explore to find cost savings. In addition to managing salary and workforce growth, the document hints at “corporate procurement and real estate efficiencies, as well as administrative simplification and agile approaches and other expense control measures.”
The main thrust of these efficiency efforts is to lock in the implementation of the $400 million “expenditure review” cuts that Kim initiated during his first term, and to look for additional cost-saving opportunities that could help make this capital increase the last one the bank has to request.
3. IFC’s surprise success story
If IBRD’s increase looked like a distant dream at the annual meetings six months ago, the idea of IFC getting a financial boost seemed even less likely, sources told Devex.
IFC’s last major increase came in 1992 when the institution was given a $1 billion boost, and in 2010, when the World Bank received $5.1 billion in paid-in capital while IFC received $200 million. Now, however, since IFC claims to leverage four times what it invests off its own books, the additional capital could grant the institution investing power to rival that of its fellow World Bank branches.
IFC’s elevated status with the bank’s governors is likely thanks to the institution’s new strategy, known as IFC 3.0 or the cascade, overseen by Philippe Le Houérou, who took over in 2016. The Frenchman has been working to reorient the institution toward a greater focus on development impact over profitability. Under his watch, staff have also developed a new approach to measuring and tracking the development impact of IFC projects, known as the Anticipated Impact Measurement and Monitoring Framework. Civil society groups received an update on the AIMM tool, which is currently being tested by IFC investment officers, at the meetings. Hans Peter Lankes, IFC’s vice president for economics and private sector development, said that as a result of AIMM, “several projects” have been abandoned as they were unlikely to have sufficient development impact to justify their going forward.
However, as with IBRD, terms and conditions apply to IFC’s new capital. Under the agreement, IFC is to commit 35 percent of its financing to climate-related projects and invest up to 40 percent of its money in fragile and International Development Association-status countries by 2030.
4. Kim’s ‘wildly controversial’ ranking system
President Kim has high hopes for the new country ranking system he plans to unveil in October at the World Bank’s annual meetings in Bali, Indonesia — and he has embraced the possibility that the new index could spark some controversy.
“It’s going to be wildly controversial, but those of you who know me and my work in global health, that’s not new for me,” Kim said Saturday, appearing alongside Bill Gates and United Kingdom Secretary of State for International Development Penny Mordaunt.
The Human Capital Index will take a similar approach to the bank’s well-known Doing Business Report, but instead of measuring how well countries support private enterprise, this index will rank them according to how well they produce health and education outcomes for their populations. Kim says that will be controversial for a few reasons.
First, he predicts that some countries will “see themselves ranked below other countries that they’ve always felt superior to,” and this will cause a stir. Perhaps more controversially, the World Bank chief envisions that the rankings could have real economic consequences for countries as they try to gain access to capital. In fact, Kim is actively working to make that happen.
“I’ve already been talking with the ratings agencies and saying, ‘look, this is a real indication of potential economic growth, so don’t you have to take this into account when you do sovereign bond ratings?”’ Kim said Saturday.
While Kim has not yet revealed how successful his discussions with ratings agencies have been, the idea of creating direct links between a World Bank ranking and countries’ credit ratings will no doubt invite scrutiny of the criteria and methodology the new index employs. For Kim, the goal is to position spending items that have not always fallen under the category of productivity investments as central components of long-term economic health.
“If countries all of a sudden see their borrowing costs go up, that will catch the attention of ministers of finance,” he said.
Speaking during a panel session earlier last week, Henrietta Fore, executive director of UNICEF said she was "enthusiastically behind" the World Bank's proposed index and said that in terms of domestic spending targets, 10 percent for education and 15 percent on health would be a "good floor to start from."
5. Digital economies
One of this year’s flagship events was on creating a digital economy for Africa, which brought together an impressive array of African entrepreneurs and investors as well as Jeff Weiner, chief executive officer of LinkedIn and Nigerian businessman and philanthropist Tony Elumelu. How to help the continent leapfrog the traditional economic development path by building a digital economy was the topic, but the real activity took place at a roundtable discussion, which included ministers of finance, held after Thursday’s event.
IFC and the World Bank have identified digital economies in Africa as a priority and also an opportunity to operationalize the institution’s commitment to working more collaboratively across its constituent parts. It is also “a great test case” for IFC’s strategy to create markets, Le Houérou said during the panel session. IFC plans to catalyze investment in the necessary connectivity infrastructure and platforms, while the World Bank will play a convening role to help build and promote enabling policy changes. The bank and IFC are expected to announce partnerships with a number of African countries to drive the digital economies agenda in the coming months.