The new World Bank presidency and the crisis of multilateralism

The announcement in January that Jim Kim would step down as president of the World Bank came as a surprise. Less surprising was the news that followed: Kim was leaving the foremost multilateral development institution to join a private investment firm. It is a fitting act. Kim often seemed more interested in promoting private investments than in the basic mission of the World Bank to support development through low-interest loans to governments.

The new president, David Malpass, may present other challenges to the World Bank’s mission as a Donald Trump nominee and a long-standing critic of international financial institutions. In his campaign for the position and during his early days at the Bank, Malpass has signalled that he will not attack the global policy consensus on sustainable development and climate change. However, the status quo was failing before Malpass took office. The Bank needs to be transformed to support sustainable development and a just transition to a zero-carbon, zero-poverty future.

There is a crisis of multilateralism, rooted in decades of rising inequality and the favouring of profits over people. If changes are not made, the crisis of multilateralism will worsen and the ground on which the Bank stands will disappear.

A trademark of Kim’s presidency was the creation of the twin goals in 2013 to crystallise the purpose of the institution: ending extreme poverty and boosting shared prosperity. The goals are undeniably noble, but the devil is in the details.

Ending extreme poverty means that less than 3 per cent of the world’s people would live in extreme poverty by 2030. In 2015, the international extreme poverty line was revised upward to US$1.90 per day. Under criticism that the line failed to capture the reality of poverty, the Bank also created poverty lines based on country income categories.

The Bank touts progress on reducing extreme poverty but there are several caveats. Most of the progress took place in China, hardly the bastion of policies promoted by the Bank. The extreme poverty line also obscures a lack of progress relative to the cost of living and freedom from hunger. Nonetheless, the goal has been thoroughly integrated into the rhetoric and thinking of Bank.

Private sector vs. development goals?

The international community reached a consensus in 2015 on the Sustainable Development Goals, including Goal 10: “By 2030, progressively achieve and sustain income growth of the bottom 40 per cent of the population at a rate higher than the national average.” This contrasts with the limited Bank definition that only seeks rising incomes for the bottom 40 per cent.

Achievement of the Bank’ goal could therefore coexist with a failure to reduce high-income inequality levels, or even greater inequality. A 2017 report of the Bank’s Independent Evaluation Group found that only 18 per cent of projects had a “minimally well-articulated” plan to foster shared prosperity.

With increasing levels of in-work poverty, precarious work and untenable levels of income and wealth inequality, the Bank must refocus on shared prosperity. This includes a direct approach to raising incomes. The current preference is on ‘pre-distribution’ measures such as education and health. These areas are human rights and important factors for growth unto themselves.

Reducing inequality and boosting shared prosperity will require tackling poverty wages, including through the strengthening of trade unions and centralised collective bargaining systems, coordinated wage increases and the reversal of labour market deregulation. Unfortunately, recent policy discussions from the World Bank, including the World Development Report 2019, move in the opposite direction.

These divergences cannot be ignored. The goals and operations of the World Bank should be aligned with the global policy consensus and the reality facing millions of people. The Bank can start by systematically tracking the jobs outcomes of lending in low-income countries to ensure that there is a proven contribution to ending poverty and boosting shared prosperity.

One of the first challenges for the Malpass presidency will be the strong position taken by US congressional representative Maxine Waters, chair of the House Financial Services Committee. The Committee has oversight of the US Treasury and Congress has extensive power over the allocation of money. In a 9 April hearing – coincidentally the first day for Malpass as Bank president – Waters criticised a programme called the Private Sector Window and threatened to prevent the allocation of money to the Bank if the programme is not ended or drastically reformed.

Donor governments periodically replenish the money available for lending by the International Development Association, the arm of the Bank that provides loans to low-income countries. The last round of replenishment raised US$75 billion. Of that, US$2.5 billion was allocated to be transferred out of the International Development Association and into the segments of the Bank that finance the private sector. This money is used to provide funding with highly advantageous terms to private actors operating in low-income countries. Waters described this approach as “subsidising private firms selected without competition” and “likely to prioritise financial returns over positive development impacts”.

The Private Sector Window is just one facet of a focus on private involvement in development at the World Bank. The Maximising Finance for Development approach, also known as the ‘cascade’ approach, seeks to reorient the Bank away from public investments that create the foundation for economic growth. Under this approach, the Bank helps countries reform to attract private investment, and Bank money is used to incentivise and subsidise investment.

Together with other international organisations, the Bank supports making ‘infrastructure an asset class’ in order to facilitate investment by institutional investors, such as pension funds, by bundling projects into securitised investment vehicles.

The promotion of private investment leads to more private operation on the ground. For infrastructure to be an asset and an attractive destination for private investors, it needs to produce revenue. This is often realised through Public-Private Partnerships that hand operation of public assets to private businesses. Public-Private Partnerships have a long history of failure and can reduce access, such as through toll roads.

In his first week, all eyes were on David Malpass and on the topic of climate change. In the early days of the Trump administration, the US withdrew from the Paris climate accord and reversed an Obama-era policy to vote against most coal projects at the World Bank and other development banks. Speaking to staff on his first day, Malpass reportedly mentioned climate twice as a task for the Bank. Time will tell if this truce will hold, and how Malpass will approach the relationship of China and the World Bank.

The leadership of international organisations increasingly understand that a crisis of multilateralism is occurring but are failing to offer effective policies to reduce inequality, combat climate change and create new rules for a fair global economy.

It remains to be seen if Malpass shares this concern about the rollback of multilateralism, and if he can lead the Bank on a rescue mission to support sustainable development before it is too late.