Making economies work for more people is a political task, not a technical exercise. The World Bank has just conceded this – without meaning to do so.
In theory, they are right. In practice, the bank may be recognising that the politics which shape it made it impossible for it to achieve the development which it promised for the poor.
The change was outlined in an April speech by bank President Jim Yong Kim, and is discussed in a recent document spelling out the bank’s vision for 2030. It’s meant to change it from a lender for development into a broker which will unlock “trillions” of dollars in private investment. It will seek to help countries by advising them on the policy and governance changes they need to make to attract the money. So the Bank will become a conduit for private investment, not public development funding.
The Bank does not say it is giving up on public funding. But its document declares that:
Only where market solutions are not possible … would official and public resources be applied.
So public development funding will be used only where it cannot attract private investors to poorer countries. Since Kim insists it can unlock “trillions” of dollars which can transform developing countries, it seems unlikely to reach for public funding in a hurry. So it seeks now to act as a broker for private investment, not public development.
Increased poverty and conflict
The bank’s critics point out that private funding wants returns, not less poverty. They warn that relying on it for development will increase poverty and conflict. Ironically, they are repeating criticism that Kim made when he was a development practitioner – that development was being shaped by the agendas of private funders.
In principle, the shift does abdicate the World Bank’s mandate. It was a product of the 1944 Bretton Woods conference where its architects, John Maynard Keynes, Henry Morgenthau and Harry Dexter White, all saw an important public sector role in correcting some of the market’s impact. The bank was an instrument of that public role - one of its functions was “counter cyclical” public funding to stimulate economic activity when dips in the business cycle depressed markets.
The bank’s shift abandons this role and places the fate of the global poor largely in the hands of private wealth. It seeks not to find ways in which private money can serve public needs but how public needs can shift to meet the demands of private money.
It could be seen as the final abandonment of wealthy countries’ obligation to the rest of the planet, US President Donald Trump’s “America First” translated into a development strategy.
But in practice, it’s debatable whether the shift will change much in the life of the world’s poor.
A role to markets
The role the World Bank’s architects had in mind may describe what it did at the beginning when it funded the revival of war-torn Europe. But, when it began to fund development in poor countries, it gave a role to markets well beyond anything its inventors would have endorsed.
In Africa, it demanded Structural Adjustment Programmes which cut back sharply on public welfare and, in the view of critics (such as Kim in his previous incarnation), caused great suffering. Its determination to ensure that funds went only to the most desperate (cutting the funding burden) once prompted it to recommend, in Tunisia, a biscuit so unpleasant that only the very hungry would eat it. The World Bank’s private finance arm, the International Finance Corporation (IFC), whose role will be strengthened by the shift, was fingered as the chief cause of that suffering.
So the bank behaved in much the same way and for much the same reasons as its critics fear it will behave now.
It and its supporters insist it made a positive impact: they cite data showing a marked drop in global poverty and say it contributed to this. But the figures are hotly debated. Even if they are accurate, there is no clear evidence that the bank helped make them happen. Nor has it created a world in which many more people find a settled role in the economy.
So the bank’s new role may, therefore, be simply its old one, but now with an accurate product description.
This may overstate the case: the bank has, at times, made a serious attempt to listen to critics and to become a conduit of development, not pain. But it was never able to adjust as an organisation – it would often endorse criticisms in theory but not translate them into practice. And so it did not become an effective development engine. The bank’s current shift has probably been prompted by its declining role as a development funder, as poorer countries discover other sources of finance.
More finance, but more expensive
The bank failed to do what it promised because it reduced development, a political task, to a technical exercise. It did this because its own political constraints ruled out an effective role.
Effective campaigns against poverty and inequality happen for one of two reasons. Either elites decide it’s in their interests to fight them or, in democracies, poorer citizens use their vote and their rights to achieve change.
Neither condition applied to the World Bank. Its decisions are not made democratically because votes are allocated in proportion to capital invested, not the number of people a government represents. America always appoints the bank president because it provides most of the capital and has most of the votes.
The Bretton Woods trio did not see that the New Deal, the US programme in response to the Great Depression in 1933, had worked partly because it had a solid base of democratic support and that democracy was essential to the development they sought. In the absence of democracy, the elites have decided what the bank should do. Since the focus shifted from Europe to the rest of the world, they have shown little interest in changing a state of affairs from which they benefit.
It’s this political context which has caught up with the bank, first reducing its role and then forcing it to give up on public funding to fight poverty. Ironically, the critics who insisted that it take politics seriously have been vindicated in a way they did not intend or expect. Challenged to recognise politics’ role in development, it has done so by concluding that the politics which govern how it works make an effective role in development impossible.
The planned reinvention of the World Bank may be a mea culpa of sort from the multilateral funding institution. But it is still a bearer of bad news for poor African countries.
The World Bank is looking to migrate from the model that largely relies on member states providing loans for development projects, to one in which it becomes more of a broker of private capital to be invested in development projects.
The World Bank Group President Jim Yong Kim believes that a sizeable portion of private capital lies idle. With proper steps to eliminate unacceptable risks, this capital can be channelled into funding development in poor countries.
Private investors are generally risk-averse. This means that mountains of idle cash remain largely untapped at the expense of real investments. These could generate jobs and green energy as well as reduce poverty, improve health care and extinguish debts that are haunting countries the world over. Kim argues that development finance needs fundamentally to change in speed and scale, growing from billions of dollars in development aid to trillions in investment.
He believes that there are significant financial resources readily available and sitting on the sidelines of capital markets. They generate little in the way of returns, particularly compared to what they could make if invested in developing countries. Private investors lack knowledge about these countries, and their tendency to remain generally risk-averse means that the funds remain largely untapped.
Kim’s argument amounts to an admission that the Bretton Woods system has failed to address gaps in the global capital markets. And that its institutions – the International Monetary Fund and the World Bank – which were established after the second world war to foster international economic cooperation – have failed to support the world’s developmental needs.
But private sector funding won’t help the situation because the much needed developmental investments in Africa are social in nature. Private investments will also be costly, and as a consequence, exploitative.
Weaknesses in Bretton Woods institutions
The Bretton Woods multilateral institutions have been strongly criticised for their corporate led model, which tends to undermine social justice. Over the years they have been focusing on profit oriented investments. Many have impoverished people in emerging economies, particularly in Asia and Africa through displacements, large scale privatisation, natural resource looting and environmental degradation.
Aid and loans from the World Bank and the International Monetary Fund usually come with strict conditions and restrictive policy recommendations. These take away the economic freedom of aid recipients and borrowing countries. They include strict inflation controls, high taxation, large scale privatisations, rapid trade liberalisation and cutting government expenditure on social services.
Conditions on aid and loans usually forfeit states’ authority in governing their own economy, as national economic policies are predetermined under the loan packages. This ultimately shifts regulation of national economies from state governments to the Washington institution in which African developing countries hold little voting power.
The number of emerging countries depending on the World Bank funding has drastically declined over the past ten years. This has been mainly due to increasingly attractive alternative sources of financing. The bank has been rendered irrelevant as private capital flows to the developing world have grown on the back of governments issuing sovereign bonds. Its role has gradually become a mere aid agency dealing with a smaller group of low-income fragile states,
The new generation of institutions spearheaded by emerging market governments led by China is further threatening the traditional multilateral institutions.
This is what lies behind the World Bank’s efforts to reposition itself from being a lender for major development projects relying on funding states, into a broker for private sector investment. This would shift it from being a body that disburses development aid to one that mobilises investment.
But the World Bank’s proposed repositioning will have a number of negative implications on countries in Africa.
First, it will further disadvantage developing nations as most investments in Africa are classified as risky. This means that most investors are unwilling to commit funds for longer time frames. And, given the high risk assessment, borrowing will be expensive. This in turn will push countries further in debt and expose them to exploitation by private lenders.
Second, the repositioning from public to private funding will further cement the World Bank’s business model at the expense of social benefit. This will undermine the role of the state as the primary provider of essential goods and services, such as health care and education.
Last, it will be almost impossible for the bank successfully to mediate between the interests of a global markets system, developing country governments, and people in poverty. This is because projects attractive for private investment are out of the reach of poor people.
There’s no reason to believe that the bank’s envisaged new role will lead to a reduction in poverty. The more likely outcome will be that it once again fails to address international capital market shortcomings.
The World Bank said on Sunday it had approved a $345 million loan for the expansion of a port in Tanzania’s commercial capital Dar es Salaam, which the East African country aims to turn into a regional gateway.
Dar es Salaam is vying with the port of Mombasa in Kenya to become the trade hub for landlocked neighbours such as Zambia, Rwanda, Malawi, Burundi, Uganda and the Democratic Republic of the Congo, but both ports are hobbled by congestion and inefficiency.
The port handled 13.8 million tonnes in 2016 – an increase from 10.4 million in 2011, reflecting an average growth of 9 percent per year, according to the bank. Tanzania wants to lift its capacity to 28 million tonnes a year by 2020.
“The project represents the start of an incremental process towards increasing the capacity of the port of Dar es Salaam and strengthening its economic role in the region,” Richard Martin Humphreys, the World Bank’s lead transport economist, said in a statement.
In a 2014 report, the bank said inefficiencies at the port was costing Tanzania and its neighbours up to $2.6 billion a year. The statement said ongoing infrastructure investments at the port were expected to improve overall productivity and reduce waiting time to berth from 80 hours to 30 hours.
“Enhancing its operational potential will boost trade … and reduce the current cost of $200-$400 for each additional day of delay for a single consignment,” said Bella Bird, the World Bank’s Country Director for Tanzania.
The loan is the second batch to be approved by the bank for the expansion of the port this year. Tanzania received $305 million in January. Last month, the country also signed a $154 million contract with the state-run China Harbour Engineering Company (CHEC) to build a roll-on, roll-off (ro-ro) terminal to deepen and strengthen seven berths at the port.