Ajay Banga could hardly have had a better entrée into his first annual meeting as president of the World Bank. He received strong endorsement from country shareholders, winning the race for the job unopposed. Then at the G20 summit in early September, leaders promised him “more headroom and concessional finance”.
Even though Banga took over the reins on June 2, just as the Bank and many of its shareholder governments were entering the holiday season, he has tried to hit the ground running. He has already coined a new slogan for the Bank: “To create a world free of poverty on a liveable planet.”
Those last four words are a sign that the World Bank under Banga will aim to embrace the fight against climate change, while continuing with its longstanding goal of ending poverty and delivering shared prosperity.
This has been greeted with relief by environmental lobbyists and finance ministers of low income countries most vulnerable to the impacts of climate change. They had been dismayed in September last year when Banga’s predecessor David Malpass said he was unsure whether he accepted the scientific consensus that human fossil fuel consumption was a leading cause of the phenomenon.
Banga’s opening address this morning (Wednesday October 11) will give him his first opportunity to send a focused message to government ministers, other stakeholders and the media about his agenda for the next four years.
“He will use the speech in Marrakech to say where he wants to go,” says Paul Cadario, a fellow at the Munk School of Global Affairs and Public Policy at the University of Toronto, and former World Bank staffer.
“He may be in a position to give some hints about the areas that he and some of the major shareholders are prepared to discuss, and indeed have begun talking about already with the relevant senior staff of the Bank.”
The big issues
One area Banga is certain to focus on is what in development finance jargon are called global public goods (GPGs) — issues that benefit the whole world.
Three of these were highlighted in the Evolution Roadmap drawn up by the Bank’s development committee earlier this year: tackling climate change, improving pandemic preparedness and dealing with fragile and violence-affected states.
In his world tour of key emerging economies before the selection vote, Banga pledged that under his leadership the Bank would work with partners to mobilise additional funding to address GPGs.
This technical-sounding concept is likely to be of prime importance to Banga, as the World Bank is asked to take centre stage in delivering solutions to major cross-border problems such as hunger, financial instability, climate change and biodiversity loss.
The benefits can be huge, as Oxford Economics, a consultancy, showed in a report on GPGs for the German economy ministry. It estimated, for example, that a $3.15bn development policy loan to Egypt by the International Bank for Reconstruction and Development over the three years to 2017 had delivered a cut in CO2 emissions of 50m tonnes, which it valued at $15.8bn.
The difficulty in financing GPGs is that although their benefits spread globally, the money has to be spent in defined places, which can make some governments reluctant, unwilling for their money to support projects in other countries.
Fairness problem
The Oxford Economics report, which has been presented to the Bank’s executive directors, sets out recommendations to ensure development banks maximise the benefits of GPG investments on the ground. They range from using cost-benefit analysis and focusing on projects with high cross-country benefits to helping coordination of in-country provision and encouraging regional learning.
Johanna Neuhoff, associate director of consulting at Oxford Economics, says that although global public goods require global collective action, their under-provision can only be tackled at the local level.
“The World Bank by its role and its mandate is a global institution uniquely positioned to support and finance the country-specific delivery of GPGs,” she says. “Thus, from global goals to local action should become a guiding narrative for the World Bank’s GPG country engagement.”
Cadario at the Munk School agrees the challenge with operationalising GPG investments is to identify who benefits and who pays. “You’ve still got that problem that global public goods are, by definition, hard to lend for, and the instruments that people have come up with so far have been probably underfunded.”
A master(card) strategy
The G20, whose members range from the largest advanced economies to fast growing emerging and developing countries, has written a long shopping list for Banga’s World Bank, still the most important source of multilateral financing to low and middle income countries.
In the declaration after their September summit, the G20 leaders defined goals including eliminating hunger and malnutrition, strengthening health systems, delivering quality education, advancing gender equality, addressing climate change, narrowing skills gaps, protecting biodiversity, mobilising private investment and supporting digital transformation.
Whether by chance or not, this closely matched a joint statement a couple of days earlier by Banga and Kristalina Georgieva, managing director of the International Monetary Fund.
They devoted a large chunk to digital transition, which they described as “at the forefront of development, [providing] a unique opportunity for countries to accelerate economic growth”. Yet in 2022, they said, nearly 3bn people remained offline.
As CEO of Mastercard for 13 years before joining the World Bank, Banga led a programme that brought 500m unbanked people into the digital economy. “Digitalisation offers us the opportunity to shift the landscape and level the playing field,” he told the Center for Global Development thinktank earlier this year.
Karen Mathiasen, a project director at CGD and former US executive director at the World Bank, says the issue also consumed a “frightening amount of language” in the G20’s post-summit declaration.
“Banga has been very focused on digitalisation,” she says. “[There is] no question that he sees that as a solution, or a part of a solution, to a lot of development challenges. That will be something I think he will want to leave an imprint on.”
Tight fists
Whatever strategy Banga’s World Bank adopts, it will require a massive injection of finance. He has said the bill for tackling “an abundance of challenges” will outstrip its current resources. Banga warned in April: “For infrastructure, for climate [and] for inequality, the math is not on our side, and the World Bank cannot do this alone.”
At the summit the G20 uttered strong words about the need to increase the Bank’s firepower, saying: “We will collectively mobilise more headroom and concessional finance to boost the World Bank’s capacity to support low and middle income countries that need help in addressing global challenges.”
But as Mathiasen points out, President Joe Biden came to New Delhi with a proposal to ask the US Congress for $2.25bn of extra funding for the World Bank.
US national security advisor Jake Sullivan said Biden’s request to Congress “would have the impact of increasing World Bank financing by more than $25bn”.
Just days before the summit, Sullivan said the US was working to make sure other partners followed its lead.
But that aspiration was met with silence. “The fact of the matter is,” Mathiasen says, “that President Biden came home empty-handed, and the world’s poor were short-changed.”
In any event, Congress is trapped in a political stand-off over the budget. As long as the US government teeters on the edge of a shutdown, a general capital increase for the World Bank, which it suggested in January, is out of the question.
Therefore, following in the footsteps of his predecessors, especially Malpass and Jim Yong Kim, who promoted the slogan “billions to trillions” for scaling up development finance, Banga will have to pivot towards harnessing private sector capital.
Can private capital fill the gap?
In July the Bank set out its vision to “stretch every dollar” while preserving its triple-A credit ratings. It included using more guarantees to reduce risk for investors, raising hybrid capital from shareholders, leveraging more of the callable capital pledged by shareholders, and a new Private Sector Investment Lab to generate and test ideas to remove barriers to investment in emerging markets.
“He’ll have to do a bit of a patchwork approach — a little hybrid capital from here, a guarantee from there,” Mathiasen says. “It will not be nearly as clean or as robust [as a capital increase], but that will end up being his only option.”
The Bank says every new $1 of capital (or the equivalent in other forms of risk support) could support an additional $6 of new World Bank lending over a 10 year period.
Luiz Vieira, coordinator of the Bretton Woods Project NGO network, says the best estimates by the UK’s Overseas Development Institute are that each $1 of public sector lending then generates about another $0.70 of private investment.
Taking those estimates together, $1 of fresh capital could generate $10.2 of total financing. It would still take a very large amount of capital to raise the trillions of dollars the developing world needs.
“The trillions have not materialised and the model has failed on its own criteria,” says Vieira. “How much risk shifting to the public sector would it take to meet the risk-reward appetite of the private sector?”
Instead of trying to woo an ever-reluctant private sector, Vieira implores the US instead to urge shareholders to meet the UN target of spending 0.7% of their GDP on official aid, and to clamp down on illicit financial flows.
However, he is sceptical that Banga can grasp this nettle, because of both the faith in innovative finance he has brought from Mastercard and his lack of development experience.
Like many NGOs, the Bretton Woods Project is disappointed Banga was selected, because it perpetuates the tradition that the US government effectively chooses an American citizen to run the World Bank — albeit, this time, a citizen who was Indian-born — while European shareholders pick one of their own to lead the IMF.
“The fact that he comes from Mastercard for us is problematic because we’re concerned about the deepening financialisation of development,” Vieira says. “This idea that there’s not enough public finance out there, so we must increasingly rely on private sector finance and the role of private sector development — we find that troubling.”