Experts react: The good, bad, and meh in the World Bank's reform plan

Under pressure from some of its biggest shareholders, the World Bank delivered a roadmap for reform last month that was underpinned by management’s proposal for shareholders to give the bank more financial resources. The plan is meant to get the anti-poverty lender in shape for the modern era of slowing economic growth and multiple crises — with climate change a critical threat on the radar. There is much to like in the document, many development experts outside the bank said in interviews with Devex, including a clear desire to get more support to countries and focus on tackling climate change from a cross-border perspective. But there is also a sense the document was meant to be a starting point for negotiations and should have laid out a more aggressive approach from the outset. “We will be very interested in views of the global community.” --— David Malpass, president, World Bank Moreover, given the complex and somewhat obscure nature of the talks ahead on balance sheet optimization, risk ratios, and funding mechanisms, a key question hangs over the plan’s fate: Will the drive for reform run out of steam before serious change gets enacted? “The real risk is it turns into technical discussions and the political momentum fizzles out,” said David McNair of the One Campaign. Ultimately, the final say on reforms comes down to the shareholders, which are governments. The plan now is to tackle some low-hanging fruit by the bank’s Spring Meetings in April and make progress on thornier issues in the fall, around the time of the Annual Meetings. A slow-moving process would mean the reforms clash with the U.S. presidential campaign next year, which could derail the movement for change as Washington — the bank’s largest shareholder — gets sucked into the domestic political cycle. On the other hand, a reform process that moves too quickly could lack transparency and comprehensiveness. The words “ambition” and “unambitious” came up frequently in Devex’s discussions with the experts. One person described the initial pitch as a “lowball” effort. The roadmap’s approach — which provides shareholders with a menu of options — seems strategic as management prepares for the talks ahead. But this is a ploy that falls flat, in the view of Jonathan Walters, a former World Bank leading economist who spent more than 25 years working at the lender. “A good tactic would be to tell donors: ‘Here is our ambitious plan that we can accomplish if you provide us with resources’,” Walters said. “Instead, the opening salvo is the opposite, arguing for resources so that they can come up with something ambitious.” Doing more with more Increased lending is a clear demand from shareholders such as the United States and Germany. The bank says one way to achieve this is for donors to pay in more capital. However, this ask to shareholders is fraught with the China conundrum that has plagued the bank for years: Beijing is currently the third-largest shareholder. If a capital increase does not take place evenly across the major countries, then China can climb to number two, replacing Japan and giving Beijing more voting power — which is making Western nations balk. The capital increase proposal seems broadly reasonable among outside experts, as the bank is able to leverage the money on markets, stretching every dollar paid in while also recycling the funds over and over — unlike one-off aid donations. McNair — whose anti-poverty organization, the One Campaign, has followed the reform plans closely — says he also wants to see the bank focused on using its existing capital more effectively in what is known as balance sheet optimization. “It’s very important that this is prioritized,” he said, adding that the bank needs to remove layers of bureaucracy to make its lending more efficient. Last year, as the movement for reforming the multilateral banks gained momentum, a group of independent experts released a report commissioned by the Group of 20 leading economies laying out five recommendations for how the bank could lend much more money with its existing capital without hurting its coveted AAA credit rating. Notably, the roadmap did not specifically mention the G-20 capital adequacy framework, or CAF, report, though it alluded to some of its proposals, which are clearly informing the discussions. The report is seen by shareholders as a key building block of reform to address some of the “most urgent financing capacity issues,” along with reviewing the bank’s mission and operating model. However, World Bank President David Malpass said he would engage and seek feedback from the CAF report team, in addition to the broader public, as part of the reform talks with shareholders. “We will be very interested in views of the global community,” he said on a phone call with reporters Tuesday. “The idea is to have everything on the table.” Malpass has been under pressure to get the roadmap moving, most notably from U.S. Treasury Secretary Janet Yellen, particularly after his now-infamous gaffe on climate change in September. The Trump-era nominee is entering the last year of his term, making this period of time consequential in terms of his legacy. Projects should ‘blow up’ sometimes One issue raised by the CAF report was risk-taking: It echoed long-standing arguments that the bank is too conservative with its lending. Taking risks will become ever more important as the bank is being asked to tackle so-called global public goods, which encompass things such as climate change and pandemic prevention that affect everyone. This will mean a fundamental shift at the bank — and among shareholders — toward a new model that allows for failure, according to several experts. “If you don’t want to do things that might fail then by definition you are not taking risks. And when it comes to global public goods, there is a greater chance of failure,” said Walters, the bank veteran. His comments were echoed by Sony Kapoor, a finance expert at the European University Institute, who bemoaned an incentive structure across the development banks that penalizes failure and does not reward risk-taking. Management will get raked over the coals if things go poorly, but nothing encourages some audacity in their investments. “The shareholders have an important role to play. They need to socialize the fact that they want things to occasionally blow up,” he said, if they truly want more risk-taking. Right now, he said, projects across all the multilateral financial institutions rarely fail spectacularly. If projects occasionally fail, it not only means the bank is making calculated bets, but that it is investing in projects with greater potential impact. Kapoor argues that in a world where low-income countries have immense unmet financing needs and worsening levels of debt distress, the bank — both its management and shareholders — needs a three-pronged approach that lays out clear guidelines for a capital increase; risk-taking and balance sheet optimization; and a better use of the callable capital theoretically on hand. “Given the size of the financing gap, we will need all hands on deck, so we will need all three and then some,” he said. But shareholders will need to be pushy. “Shareholders need to send this back to bank top management and ask for a more ambitious approach that is also more realistic,” he said. Several experts believe the better plan should include a path for the World Bank to be a leader among its peers. Indeed, after a meeting with management last week, the board insisted the bank figure out how to be “engaging more effectively” with other international finance players. McNair said simply that the Washington-based bank needs to end its “splendid isolation.” The road ahead As with any major reform process, there are a ton of details to be debated in the months ahead. Meanwhile, activists and experts are asking a few big questions and raising alarms about trade-offs. Will the bank end up dropping its fight against inequality in and across countries as it changes its mission, as Oxfam worries? Will the bank set up ambitious funds, such as a proposed pot for concessional lending to middle-income countries, that like many other such pots of money never get the amounts of capital they need to be effective, as the climate think tank E3G frets? And, critically, will low-income countries suffer as middle-income countries suck up more capital for financing climate mitigation? Kapoor believes that reality dictates clashes between competing demands in the short term. “The roadmap is framed in that it starts by stating there isn’t a trade-off between climate, broadly defined, and development. And that’s not true in any 5-10 year timeline,” he said. Charles Kenny at the Center for Global Development warned of a “nightmare scenario” in which financing is diverted from anti-poverty projects in the lowest-income countries for untested climate projects with sketchy metrics in middle-income countries that are big polluters. But even if the bank were to improve the quality of climate finance projects available, he still worries about priorities for the constrained cash flows. “What the bank is doing in the poorest countries should not be sacrificed for doing more in other areas like global public goods,” he said. This is the idea of “additionality” — ensuring that as the bank’s mandate grows, additional funds are made available, especially as questions linger over the ability to draw in more private capital. “There is still way too much optimism around taking a little bit of public money to catalyze a lot of private money,” Kenny noted. He has previously criticized this optimism, known as the billions to trillions agenda, saying the “idea is as reality-based as a Shrek movie.” Finally, the lack of public participation in the talks is something rankling experts. “The process should have been more transparent,” Kenny said, noting that experts for weeks relied on reporting in the media, including Devex, until the report was finally made public. “For a process they want to wrap up this rapidly, on transparency, it’s just not good enough,” he said.