Tucked within that $75 billion fundraising achievement was some financial engineering the bank had never done before — in particular, a move to raise money on capital markets by issuing bonds. The 18th replenishment, or IDA 18, also included some tweaks to the concessional financing model; as well as a new private sector window, which will allow the World Bank to use IDA money to finance private sector investments in IDA-eligible countries. The bank also committed to doubling the IDA’s resources for fragile and conflict-affected states.
Speaking a week before the start of the World Bank Spring meetings, President Jim Kim outlines a different vision of development finance — one that crowds in commercial finance — and talks about the organization's role in bringing it to reality.
As vice president for development finance at the World Bank, Axel van Trotsenburg has been responsible for developing a package of financial innovations that could help IDA do more — and that 54 donors to the fund could agree to support. For van Trotsenburg, the IDA replenishment is evidence that it is still possible to move development ideas forward in a divided world.
“Everybody’s talking about the $75 billion [replenishment], and I’m very happy and very proud of this. But what is actually the most important thing is [that] this was the ultimate success of multilateralism — that we as an international community can still get together and agree to an ambitious set of actions that will help the poorest countries,” he said.
“There are so many forces these days that want to withdraw — nationalistic voices, xenophobia. We need to be actually celebrating that we can, as an international community, come together and have good debates … but also with a strong focus [so that] when you have the [Sustainable Development Goals] and the 2030 Agenda, we don’t leave it at talk, but we create platforms of action. That is IDA 18,” he said.
Here is an excerpt of our conversation, which has been edited for length and clarity.
Let me ask you about IDA 18. You described this triumph of multilateralism, but in the world we live in, something that happened just a few months ago already seems like it happened in another age. Are you confident the commitments made to that replenishment will be upheld, or do you see any reason for concern about backsliding?
The way this thing works is, you negotiate. So you had this agreement in December in Indonesia. Then you need to go to the board so that the board can approve what was negotiated, and then recommend it to the board of governors. In January we went to the board, where it was unanimously applauded in the board meeting. On March 31, we got the votes in. Out of 173 countries, 164 voted in favor — over 90 percent of the vote. This is the highest vote ever. Last time, for IDA17, [we received] 140.
Since the negotiations in Indonesia, we have had additional countries coming in. They include countries like Greece, new donors like Nigeria, and new pledges like Spain. We are now at 54 donors, so these have been positive signals.
Do countries in the world community go up and down? Yes, this has happened in 55 years constantly, because not everybody has good times. But I think countries have made a very genuine effort, and we have been very grateful about this, because it is going to be absolutely essential that we keep a very strong resolve in supporting these member countries that need our support.
United States Treasury Secretary Mnuchin says the Trump administration will request a robust contribution to IDA, but he doesn’t explicitly say it will fulfill its pledge. Do you see any coded language there that makes you worry?
In the [White House ‘skinny budget’] that was released, the U.S. has said that it would cut support to the multilateral windows by about $650 million over three years. My expectation is that that would be mainly vis-a-vis IDA. At the same time, it was very clearly stated that the U.S. intends to continue as a top donor. If I look at the statement from Secretary Mnuchin to the Development Committee on IDA, it’s pretty strong. To be fair, the U.S. also said when it pledged in December, that it would be subject to review by the incoming administration. This is not exceptional — other countries also sometimes do this.
There are countries that have been substantially increasing their contributions. There are also others that have been decreasing … Our goal — which was that we asked the donor communities to stay flat in the aggregate in national currency — was overachieved.
You cannot expect, when you are dealing with 54 donors, that everybody does the same. I’m looking at the overall. I’m also looking at how these things were negotiated. I think [anybody you ask would say] this has been very constructive. I would like to build on this and focus now particularly on the implementation, so that we can produce results.
It seems to me the concern might be that the U.S. contribution was in some way a keystone, holding together other countries’ contributions. If that contribution shrinks, other countries would see less of an incentive to contribute.
The U.S. was at the core of the creation of IDA. It has always held a great place [in it], and I expect that it will continue to have that important place. Similarly, the Europeans are contributing 55 percent. The Japanese are very important. This is going to be a global effort. We cherish that. We are, for that reason, always reaching out to new donors. It’s good to see that you have Pakistan joining. You have Nigeria joining as a new donor, and then countries coming back, such as Greece. Those are good political signals.
One thing that virtually everyone seems to agree is a good idea is this new private sector window ...
There are more good ideas than that.
I wasn’t saying that’s the only one.
There are three big things: The financial transformation from a simple donor-driven model to one where you’re accessing capital markets. So you continue to rely on strong donor support, which allows you to go to capital markets — and we will have an AAA [rating]. That is a paradigm change.
Second is the private sector window. I think for your readers it is very important to know that in the past, IDA has been involved in private sector development through two angles: Through the policy angle — supporting regulatory reform, creating stable macro frameworks that are conducive to private investment — and through complementary investment for the private sector, for instance in infrastructure. That type of investment averaged $7 billion per year over the last 10 years. That is something that is not minor. When we are thinking about fragile states, this whole idea of doubling the effort is that you need jobs, but nobody will invest because of the risk. So what can you do to help derisk this? The prime driver was really to say, if for the International Finance Corporation and the Multilateral Investment Guarantee Agency, this was becoming a problem, because they could not afford increased exposure because of the risk, then how could IDA intelligently help?
The difference is, [in the past] we gave the money to governments. With the private sector window, the IFC and MIGA [will] develop a project, and [IDA] finance it. So this is the first time that you see IDA money being used directly in a private sector activity. That is the difference.
The third idea is essentially the extent of this mega-concern by the international community about fragile countries and conflict-affected countries, that the scaling up by a couple of percentage points doesn’t do the job. So, we double it, and we also create a refugee window of $2 billion. I would say these three ideas are prime.
In highlighting one of them I was not ruling out the other two. That was merely my segue.
I like to be comprehensive.
Zooming out a bit, this has been a theme — that the role of the World Bank in the future will be as an honest broker between private capital and potential development investments. When I’ve discussed that with World Bank staff, they say, “that’s something that we’ve been doing for a long time.” How much of that is happening now, and what’s the target? How much of a shift are we actually talking about?
The shift is, it’s one thing if it happens in middle-income countries … IDA is also in countries that are better off. Now with fragile countries, it doesn’t happen, because of the risk. We can talk a lot and analyze a lot, and then the question comes: What are you doing?
You have the SDGs, you have [the Sendai Framework for Disaster Risk Reduction], you have [the Paris Climate Agreement]. When do we stop the talk and create something? And push the envelope?
What you need to start thinking about is breaking down some paradigms, like the traditional donor model — get the money in, get the money out. Now, could you actually start thinking about doing something with capital markets? That’s on the funding side. On the spending side — we would give money to the government, do the reform, then you build a road for example. That’s all public sector. Could you actually [change the way you] think in a more challenging environment so that you don’t stand on the side with your analysis and say, “oh it’s too risky?”
What it is yielding in the bank is a whole discussion about how to approach it. You don’t want to give handouts. You want to be very clear that this is going to make a difference. There has been a lot of debate about the appropriate governance structure, a lot of documentation, because nobody wants to lose money, but [we also don’t just want to do] something easy.
Is there a specific target, or is this a theoretical framework?
If this were a theoretical target, why the hell would I do that? This has to be translated into action. This whole program — $45 billion is expected to go to Africa and it has to go into programs, it has to be credible, it will be reviewed, it will be tested on the results, and that’s the way it should be.
What I don’t want to tell them is that by September 15, I want to have five [private sector] projects at the board. I don’t want that. I think quality matters, thoughtfulness [needs to] happen, and you need to balance that with the ambition.
What is driving the shift?
What I’ve seen with the donors is that certain things are ripe for action. When I was a country economist on Côte d’Ivoire and was already writing a couple of years back that we should have multilateral debt relief, that was a taboo within the bank. It took [former World Bank President] Wolfensohn to get that paradigm shift that, yes, there could be multilateral debt relief. Going into the [capital] market — that idea we floated. I did IDA16, and we had a financial working group. We had [proposed] that, but the time was not right. The way it was rightly done was in IDA 17, when we had a concessional partner loan. It introduced for the first time the notion that you get financing instead of a grant.
That is also the beauty. You need to bring everybody with you. Certain things, you could ask, “could you have done it earlier?” I would say, in my mind, yes. But that doesn’t matter. I have more ideas, as my staff will confirm. This is where you need to bring the world community together. The biggest challenge is always how you work that spectrum well.
Can you achieve this shift without a capital increase?
When we talk about the stronger World Bank Group, you have the SDGs, COP21, you have enormous challenges. They are not limited to the IDA countries, but also the middle-income countries. The way I actually see it is, we focused on first things first, namely the poorest countries. That’s the first big building block to make for a stronger bank that can actually respond.
Now we need to look at the second building block — how the World Bank Group can also help respond to the middle-income countries. We believe that will require a strong lending program for the membership. How one will get there, that is part of the ongoing debate. Look, I’ve done this before. You need to reconcile a lot of different views, and that’s the art of it. And I’m optimistic.
Michael Igoe is a senior correspondent for Devex. Based in Washington, D.C., he covers U.S. foreign aid and emerging trends in international development and humanitarian policy. Michael draws on his experience as both a journalist and international development practitioner in Central Asia to develop stories from an insider's perspective.
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