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Director of Development Finance and Senior Policy Fellow
Decide on how much capital the system of multilateral development banks (MDBs) and regional development banks (RDBs) needs. Achieving the Sustainable Development Goals (SDGs) will require trillions of dollars annually of support to developing countries. The hoped-for scaling up of private sector resources has not (yet) materialized. At the same time, increasing numbers of developing countries are getting into debt difficulties. Rather than doling out lending power institution-by-institution and summing up the results, the G20 should build an international consensus on what the size of the MDB/RDB system should be, then talk about how those funds are distributed and what risk tolerance should be within and across the MDB/RDB system. Given that several capital increase proposals are pending, this work needs to be complete during the next 12 months.
Consolidate the thematic funds into the regular capital/funding of the MDBs/RDB. As new international mandates have arisen, the international community has tended to fund them through ad hoc pots of money administered by the World Bank or RDBs. While such a tasking by certain shareholders or interested parties may be appropriately responsive to short-term emergency challenges, over time it can dilute an institution’s core mandate, erode managerial oversight, and lead to confusion as to where responsibility lies, if anywhere. If the short-term imperatives are in fact long-term challenges, the mandate to act should be given to one of the MDBs along with the permanent funds to address it.
Create a system-wide fund to help MDBs/RDBs take more risk and mobilize more private capital. Meeting SDG finance needs will require MDBs to do much better on the amount of private capital mobilized per dollar of MDB commitments. Capitalizing an off-balance sheet fund that uses blended finance to unlock finance seeking market returns would help make MDB finance more catalytic. And access to the fund could be structured to give incentives to MDBs to work together for greater scale. My colleague, Nancy Lee, has put forward a detailed proposal in this regard.
Get guarantee mechanisms to work. The EPG preliminary report rightly notes the need for “a programmatic approach to risk guarantees as distinct from the current project-by-project approach.” Research by our colleagues at the Milken Institute points to a mismatch between regulations governing private financial institutions (e.g., Basel guidelines) and development guarantees. Bringing the bank regulators into a constructive discussion with the MDBs/RDBs to clear the brush will perhaps be a complex undertaking, but the systemic risk posed by ramped up financing of developing countries is unlikely to be large. The proposal to have MIGA serve all MDBs is welcome, but it is more likely to work well if MIGA is made into an independent agency with capital contributed by all MDBs.
Systematize risk sharing. In the past two years, MDBs have taken advantage of risk sharing arrangements, within and across institutions, to leverage available resources for sovereign lending, without cost to shareholders. There are significant opportunities across the entire system for such arrangements. The EPG should recommend that by the end of 2019, the MDBs come up with a proposal for system-wide risk sharing that would increase lending authority by tens of billions of dollars, without any capital injection.
Provide each MDB/RDB with additional flexibility to move beyond its geographic mandate if such a move can add value to the system as a whole. Given regional mandates and needs, many of the MDBs have developed subject matter expertise that could be well used in other parts of the world. To realize economies of scale and scope across the system, shareholders should support the development of mechanisms to share best practices across the globe and to allow sister institutions to take the lead in their areas of subject matter expertise in countries outside their immediate geographic mandate.
Establish an inclusive systemic review mechanism. The EPG’s work has been useful in focusing attention on the systemic issues the MDBs/RDBs face. Such reviews should not be ad hoc, as the EPG preliminary report notes, but any permanent review mechanism risks creating another international bureaucracy. The EPG-proposed solution (a periodic joint report by the IFIs to the G20 and their own governing boards) seems too much of an insiders’ game, with not enough developing country voice, given the current governance structures of the IFIs. While the G20 could provide a way of ensuring the regularity and focus of the report, other voices need to be heard (development organizations that are not IFIs, civil society organizations, think tanks) and developing countries need to have a major stake in the process.
Appraising the executive boards. There is a widespread belief that the boards of the IFIs soak up too many resources and need reform. Broad reform is a major systemic undertaking—years of political wrangling. And the EPG preliminary report steers well away from any such undertaking. But the “true facts” aren’t on the table on a systemic basis. An in-depth look at the mandates, costs, and benefits of the various board arrangements would be a first step in thinking about reform. Just shedding some light across the system may be enough to spur some internal reform efforts.
(If you are an insider on the mandate of the G20 Eminent Persons Group regarding the international financial institutions, or you are an insider on the World Bank and the other multilateral development banks, you may want to skip this Background section. If you are not an insider, do keep reading!)
The G20 EPG (on global economic governance—do keep reading!) was created in the spring of 2017 to recommend practical reforms to improve the functioning of the international financial institutions (IFIs), and to ensure the IFIs are fit for purpose in a rapidly changing global system. The group focuses on the World Bank and other multilateral development banks (MDBs), my concern in this blog, as well as the International Monetary Fund and other IFIs focused on global financial stability.
It has been a relatively obscure and quiet group, perhaps by intention (its members are mostly apolitical experts).
Why is the EPG’s work important? After all, the World Bank and other multilateral development banks (MDBs)—the development financing arms of the multilateral system—appear well-insulated from the recent assaults on the open, liberal international order (Brexit, Trump-Bolton, nationalist and populist parties on the rise in Europe). The MDBs, for example, have substantial financial resources and solid AAA ratings—which allow them to borrow on capital markets at low cost, and on-lend to developing countries to support public and private investments with long-run social and economic returns. And the MDB model has been amply vindicated after all, by the creation of more and more of them, in the latest round by China.
On the other hand, the challenge for the MDBs, particularly the World Bank and its regional counterparts founded in the twentieth century, may be that very resilience. The risk is not a sudden withdrawal of support by major country shareholders (The United States and Europe especially), but a slow slide into irrelevance without adaptation and adjustments to the reality of this century’s challenges. Those challenges include the troubling infrastructure gap in most developing countries despite their growing access to private capital; political instability and conflict in low-income “fragile” states unable to borrow; and a critical set of collective action challenges: climate change, antibiotic resistance, unmanaged surges of cross-border migration, the risk of world-wide pandemics, inadequate increases in agricultural productivity to ensure long-run food security across Africa.
The group has just publicly released an update of its discussions in the last year, in anticipation of the G20 meeting of finance ministers later this month. Its final report is due in the fall, for discussion (presumably) at the G20 Summit in Buenos Aires—set for late November.
Disappointed but Hopeful: Three Areas where the EPG Could Set an Agenda for Change
I’m disappointed by the update—but still hopeful. In the case of the MDBs, the EPG may miss an opportunity to put some fundamental changes on the agenda—at least for discussion if not for full resolution. Even assuming differences of view on specific issues among EPG members, that should not amount to an insiders’ game; the members can use their knowledge and even their differences to propose an agenda with potential, as a colleague said well, to “shake the system rather than sculpt it.”
But I’m also hopeful. Here are three concrete issues that the group could raise regarding the MDBs.
1. The global commons
In late 2016, we at CGD issued Multilateral Development Banking for This Century’s Development Challenges, a report of a high-level panel (not of an “eminent persons group” though our panel members were all eminent too—see the link!). The first of five recommendations to MDB shareholders was for an explicit new mandate for the World Bank to promote global public goods (GPGs) critical to development “through the creation of a new financing window…with a target of deploying $10 billion a year.”
The EPG update does refer to growing threats to the global commons, including on the development side climate change and pandemic risks. These along with other collective action problems such as global food security and refugee issues, are challenges on which the MDBs could provide robust financing and related expertise that would complement the work of WHO, the Green Climate Fund and other UN agencies.
What is disappointing is that the update makes no reference to the hidden limits on the MDBs’ current ability to do so at sufficient scale and scope and effectiveness. (They all try to “green” their lending and the World Bank hosts and manages various trust funds and other special initiatives in health and climate—but these are ad hoc, and their financing is not secure over the long term.) That limit is the MDBs’ reliance, intrinsic to their business model, on the country-based loan to generate sufficient net income to cover the long-run cost of their operations.
The simplest approach would be for all MDBs to have a mandate from shareholders to secure grant financing dedicated to subsidizing their standard loan rates to encourage countries to borrow for investments that have positive global “spillover” benefits. These could be in renewable energy where it is not currently “least cost” compared to coal, for example; in mass transit and data-based efficient bus systems in Bangkok and Lagos that would reduce the commuting time of struggling low-income workers; in disease surveillance systems in the Congo and Cambodia; in deforestation programs in Indonesia and Brazil. The current limit to more lending of these kinds is the reasonable unwillingness of borrowers to pay standard (yes, partly subsidized compared to the private market) rates to finance investments that have substantial co-benefits for other countries. The example exists already in the case of donor-funded subsidies that are reducing the cost to Jordan and Lebanon of borrowing to provide social and other services to Syrian refugees in those countries.
The possibility of subsidizing loan rates would turn a constraint the banks face—the reliance on the country-based loan—to an advantage that builds on their comparative advantage.
This is a concrete idea that could be put on an agenda for broad discussion: Should the MDBs have a mandate to seek capital and other financing to address GPGs and other collective action problems beyond the current ad hoc, often unsustained approach of relying on one or another donor to one or another trust fund? This approach is hard to realize without a collective decision by all the shareholders of the MDBs, because it has no champion among any group of shareholders—low-income, middle-income or high-income countries. (See the 2016 CGD MBD report, last paragraph on page 9 for more information).
Moreover It raises a host of related questions. Where would this grant financing to cover subsidies come from? How much should loans be subsidized? Should the mandate to raise financing from its members be concentrated initially at the “global” World Bank? If so, should the World Bank be told to share resulting funds to other MDBs and lenders such as the Green Climate Fund (as recommended in our 2016 report)? And if such subsidies were available at any of the MDBs, how should member countries ensure and monitor adequate partnership with WHO on disease surveillance and emergency pandemic response, and with other UN agencies with expertise in other areas?
The clear reference in the update to threats to the global commons opens the door to putting some concrete ideas on the table for a more robust role for the MDBs on development-relevant GPGs. My hope resides in an allusion in the EPG update to the possibility of more flexibility in the pricing of loans. It’s only a footnote, but it hints at the idea of more flexible pricing, for one reason or another. Footnote 3 notes that “MDB engagements need to ensure access to…provision of global public goods in MICs.” and in that context suggests that “pricing policies should reflect declining subsidy components, as per capita income grows.” This reference to differential pricing by country, with presumably somewhat higher prices (lower subsidies relative to private markets) for middle-income countries; it opens the door to more flexible pricing in general, which in turn invites new thinking about lower prices (greater subsidies) when countries borrow for programs with global benefits.
2. The MDBs: cooperation, collaboration, and common platforms?
The EPG update calls for more collaboration across the MDBs on “principles, procedures, and country platforms”. But calls for collaboration in these (vaguely defined) areas are not new call and not likely to inspire any serious change. In fact, the banks do already cooperate where it is win-win for them, including co-financing large programs (e.g. the Asian Development Bank and the Asian Infrastructure Investment Bank), and spend a lot of time at the field level on cooperation with bilateral donors in low-income countries. Otherwise, the natural tendency is for the banks to compete (e.g. the Inter-American Development Bank and the World Bank in Latin America) for projects and programs to finance, and in their analytic work too. And competition is not always a bad thing. It invites innovation and and useful debate, and in the case of loans creates healthy pressure on the banks to reduce burdensome transactions costs and delays, from which their “consumer-borrowers” can benefit. It also gives borrowing countries “ownership” of their own investment strategies.
More disappointing is the lack of any concrete suggestion that would have shareholders consider different roles for different institutions in the “system” (“different strokes for different folks”). The 2016 CGD report was shaped by the notion that the World Bank, as the sole “global bank,” could take leadership on “global” challenges including global public goods, including in the context of continued country lending, but with a greater mandate to do more lending with positive global spillovers; and that any need for increased capital in the MDB system, including to finance basic infrastructure, should be concentrated at the regional banks, with their greater proximity, sense of ownership and trust on the part of the borrowers. That is one specific and concrete idea that could be on an agenda for shareholder discussion.
In one area, the update is clear and concrete: the potential for “joined-up” initiatives across the MDBs that could bring more private sector capital to developing countries. These include pooling and insuring risks (the banks already trade their risk exposures to offset their otherwise region-specific concentrations) and system-wide securitization of pooled loans to bring institutional investors’ huge resources to the development table, as in this proposal from my CGD colleague Nancy Lee (and see this big idea too). On insuring political risk, there is a concrete proposal for the banks to jointly help increase the financial capacity of MIGA, the World Bank Group insurance arm; what is worthy of discussion is why the banks have not been willing to “price” the current guarantee instrument they have in a way to make it more attractive, and whether a joined-up MIGA would be more likely to address that reluctance.
3. The MDBs as a “System”
The EPG update is clear on the logic of common shareholders treating the MDBs as a group, or as a system in which the sum of their parts would be greater than the current whole. That is behind the call for more collaboration. It was the “system” point that gave rise to our recommendation in the 2016 CGD report for a cross-MDB review at the level of ministers every five years—what Caio Koch-Weser, one of our panel members, called a “mini-Bretton Woods” —and which influenced (we believe) the German hosts of the 2017 G20 to create the EPG in the first place.
On the agenda of such a review would be such fundamental questions as: Do the MDBs have enough capital as a group? Is shareholder capital reasonably allocated for the long run across the banks given different regional needs? Which of them might better optimize use of their balance sheets to stretch their existing capital? Should recapitalizations and replenishments be better coordinated, to help rationalize shareholder allocations? What’s needed to enable the World Bank to follow the Asian Development Bank’s lead?
Are there imbalances across the banks in financial capacity, given their mandates and relative comparative advantages over the next decade? Is the shrinking relative size of the African Development Bank concessional window compared to the World Bank’s IDA window in Africa (the latter at least five times bigger now) the outcome of a strategic decision among member contributors? Is it sensible for the long run? Should the common shareholders of those two banks consider the logic of the “local” bank being much smaller in the region with most of the world’s failed and fragile states, the highest growth of job-seeking cohorts, and the greatest poverty? Should a new Asian Infrastructure Investment Bank focused on infrastructure in Asia and the huge potential financing role of the China Development Bank across Eurasia change or enhance the work of the Asian Development Bank in infrastructure? Should the EBRD, the World Bank, and the African Development Bank agree to some division of sectoral emphases in North Africa? And what about the Islamic Development Bank?
Also disappointing is the lack of any reference in the update to the corporate governance problem at the legacy MDBs. The problem is summarized well in the CGD MDB report: “The legacy MDBs have become overly bureaucratic, rigid, and rule-driven in large part because of shareholder governance that has failed to distinguish between appropriate strategic oversight (combined with accountability measures) and issues more appropriately within the purview of management.” Should governance issues—voice and votes, selection of heads and their roles as Chairs of the Board (except at AIIB), costs and benefits of resident boards—be on an agenda for periodic discussion by common shareholders across the banks?
Of all these questions, the most fundamental is whether the MDBs have sufficient resources for the coming decade and beyond—or as some might argue are too big given developing countries’ growing access to private capital. (On whether the IMF has sufficient resources, go here.)
On the other hand, there is time. The EPG can certainly put the idea of a periodic mini-Bretton Woods on the agenda for discussion in Buenos Aires (how often? what role for the G20?) and encourage the Argentines to take whatever next step is appropriate to ensure it “sticks.”
Imagine a G20 agenda that included: Should the MDBs have a “window” or consolidated “trust fund” with grant money, to subsidize loans with big positive global spillovers? Should MDB shareholders “assign” leadership to the World Bank on going green, and support concentrating additional capital to back traditional lending at the regional development banks? Should the shareholders debate the question: Are the MDBs as a group big enough for current development challenges? Should the shareholders consider a quinquennial mini-Bretton Woods meeting?
It is not too late. These kinds of questions need not be agreed or resolved by the EPG, only chosen, prioritized and organized—with sufficient factual background to enable a rich discussion grounded in shared facts at the common shareholder, ministerial level.
I remain hopeful that the EPG will propose a clear and compelling and necessarily controversial agenda of topics for discussion by the world’s sovereign shareholding members of the banks. I remain hopeful that a better system of “global economic governance” for development can be snatched from the jaws of insider obscurantism before the group finalizes its report this fall.
Demand for development finance as a key complement to traditional aid is growing, but despite the impressive strength of the US private sector, the US government’s ability to respond—to date— has fallen short. The good news: Congress got the memo.
Last week, a bipartisan group of lawmakers—led by Senators Bob Corker (R-TN) and Chris Coons (D-DE) and Representatives Ted Yoho (R-FL) and Adam Smith (D-WA)—introduced the Better Utilization of Investments Leading to Development (BUILD) Act of 2018, which would create a full-service United States International Development Finance Corporation (USIDFC).
The bill would address many of the obstacles to strategic and efficient deployment of US development finance efforts that our colleagues Todd Moss and Ben Leo have chronicled in detail over the years. (Check out their proposal for a self-sustaining, full-service, US development finance corporation.)
We’re also pleased to see that the BUILD Act imbues the new USIDFC with a strong mandate to promote development, including a directive to focus support in low-income and lower-middle-income countries. Todd and Rob Mosbacher Jr, a CGD board member and former head of the Overseas Private Investment Corporation (OPIC), recently wrote why now is exactly the right time for this idea.
Here’s what we’re most excited about in the BUILD Act’s vision for a new USIDFC:
At $60 billion, USIDFC’s maximum contingent liability limit is roughly double that of OPIC. And the bill provides for that ceiling to adjust with inflation to prevent erosion of the potential portfolio size in real terms. Giving the institution room to grow will allow it to feature more prominently in the US government’s development and foreign policy toolkit well into the future.
The bill grants the new institution equity authority. This is critical because OPIC is currently limited to debt financing—and the inability to make (even modest) equity investments has kept OPIC out of projects and limited its ability to structure deals. Equity authority—sensibly capped at 20 percent of any project—would better enable the new USIDFC to fulfill its mandate and put it on more equal footing with many of its peer institutions, which all use equity when it’s most needed.
In the tough markets where the USIDFC is expected to operate, the BUILD Act gives the agency the ability to initiate and support feasibility studies and technical assistance. Early support for planning and project development can enable more well-planned projects to get off the ground—and may be necessary to realize critical infrastructure projects.
It’s (more) integrated
The full-service USIDFC will be built on the foundation of OPIC and assume its portfolio. But the BUILD Act draws in a few select components of the US Agency for International Development (USAID) too. By consolidating these functions under a single roof, the BUILD Act would create an institution that is much closer to a one-stop-shop—more efficient and better positioned to structure financing packages with fewer coordination-related delays and roadblocks. Specifically, the bill would integrate USAID’s:
Development Credit Authority (DCA): DCA offers partial credit guarantees backed by the US Treasury, which facilitate access to financing for small businesses in emerging markets.
Enterprise Funds: Over the years, Congress has periodically provided resources for the creation of enterprise funds—which have a mixed record, at best.
Office of Private Capital and Microenterprise: This small, relatively new office seeks to mobilize private capital by facilitating partnerships and by deploying a combination of grant funding and advisory or technical support.
Of course, these changes won’t negate the need for strong coordination between USIDFC and other US agencies engaged in development activities—and USAID, in particular.
For US development dollars to succeed in creating inclusive economic opportunities in frontier markets, a full-service development finance institution is crucial. Introduction of the BUILD Act is a vital first step.
At a recent CGD event, World Bank President Jim Yong Kim argued that the World Bank Group (which includes the IFC) is doing more in middle income countries (MICs) because “most poor people are in middle income countries.”
President Kim went on to say:
The first question that I asked as well, for our board, is we committed to ending extreme poverty in the world so… what percentage of people living in extreme poverty live in middle income countries? And now it’s probably 65 percent.
That matches what IFC Spokesman Frederick Jones said in response to our work on the IFC portfolio. And it sounds completely reasonable—indeed, based on our calculations, World Bank statistics suggest 24 percent of the world’s extreme poor live in low income countries, 58 percent in lower-middle income, and 18 percent in upper-middle income countries. So moving beyond low income countries (LICs) makes sense for an institution focused on ending extreme poverty. But does the IFC follow through by focusing on the countries that are home to the extreme poor? Not really.
It is true that the IFC (absolutely) invests more in countries that are home to greater numbers of poor people. Figure 1 plots absolute IFC commitments over 2011-16 against the number of people living at or below $1.90 per day (note the log scale). It shows that the average absolute IFC investment in middle and low income countries with more than 10m poor people is $641 million compared to average absolute IFC investment of $405 million in countries with less than 10 million poor people living at or below the $1.90 threshold.
Figure 1: Poverty and IFC investments
Figure 2 looks at the proportion of extreme poor in a country and IFC's investments as a percentage of recipient GDP. The average 2011-16 IFC investment as a percentage of 2010 GDP in countries with more than 20 percent poor people ($1.90) is 0.35 percent compared to average IFC investment as a percentage of GDP in countries with less than 20 percent poor people ($1.90) of 0.19 percent.
Figure 2: IFC investment in developing countries
However, a focus on poverty in middle income countries does not really explain IFC’s investments in Turkey, the largest recipient of IFC funding at $4.9 billion, home to 0.2 million poor people at the $1.90 threshold. Nigeria, which is home to 424 times the number of poor people at the same threshold, only got $1.5 billion in IFC financing over the same period.
And it is worth illustrating how poorly IFC investments are targeted if the aim is to focus on countries home to the world’s extreme poor. Figure 3 lines up countries along the x-axis according to their absolute number of extreme poor (countries with no people living under $1.90 a day come first). The y-axis reports cumulative IFC investments in those countries (note some countries are excluded for lack of recent poverty data).
The first thing to note is that the IFC has invested $4.5 billion over the 2011-16 period on countries home to no extremely poor people. And it has invested over $18 billion in countries collectively home to fewer than nine million extreme poor. More than half of the total value of IFC investments 2011-16 are in countries collectively home to just 45 million poor people—leaving countries home to 724 million extreme poor people to share the remainder. Put another way, countries home to those 45 million poor people get 18 times the IFC investment per extreme poor person than do the rest of IFC’s client base.
Figure 3: Cumulative IFC investment in developing countries
The defense that IFC is targeting where the extreme poor live nowadays is only partially vindicated. But President Kim did provide a possible explanation:
Now in terms of IFC risk… what the IFC representatives will say when I ask the question, is that, look, go back to the founding principles of the institution. You have to balance your portfolio with the risky investments and the not-so risky investments, and you know, to say to IFC, you have to put all your money into fragile and conflict-affected states or IDA states, if they did that they’d have to close down fairly soon. And right now we’re in a capital discussion. And so it’s just, you know, if you’re going to go into the low income countries, you need more capital, not less
That leaves another defense from the institution: that the IFC is focusing within countries on investments that better target poverty than the country-level statistics suggest. Once again we'd welcome the IFC publishing the necessary data to test that idea, but still question if a choice to invest more in richer countries focusing on a small share of poor people is the most powerful approach for an institution supposedly so focused on ending extreme poverty.
You can download the Stata code and raw data we used to produce these figures here.
IFC Spokesman Frederick Jones has replied to our blog (and paper) on the IFC’s risk appetite. Here it is in full:
We would like to take this opportunity to respond to the Center for Global Development’s recent analysis of IFC’s work, which looked at our investment in the poorest countries.
Among international financial institutions, IFC is by far the largest investor in fragile and conflict-affected countries and IDA countries, which are the world’s poorest. Including funds mobilized from others, IFC’s commitments in IDA countries have grown nearly fivefold since 2005, totaling $4.6 billion last year—nearly a quarter of our total annual commitments. In fragile and conflict-affected areas, our commitments grew to $886 million in 2017 from $638 million in 2014. Over the past 10 years, IFC has invested roughly $7 billion in FCS, and today, one out of every three dollars that major international finance institutions invest in FCS countries comes from IFC.
We fully agree with the objective to increase IFC’s investments in the poorest countries. With our new Creating Markets strategy, which will address inherent obstacles to private investment in the most challenging markets, our goal is to have one-third of our projects in the low-income IDA countries, and for fragile and conflict-affected countries to represent at least 6 percent of our investment portfolio by 2020, up from 0.2 percent a decade earlier. That is a far higher level of ambition than a simple comparison over time would suggest—today there are 31 low-income countries (LICs), mostly small, whereas in 2003, which serves as reference year for much of the CGD trend analysis, there were 66 LICs, including very large countries such as India, Indonesia, Nigeria, and Pakistan.
While the shift towards the poorest countries is IFC’s key strategic priority, it is important to note that two-thirds of the world’s poor live in middle-income countries. Investment in these countries is critical to reaching the Sustainable Development Goals and fighting key challenges, such as climate change. IFC projects in middle-income countries do not simply replicate what the market does anyway. They innovate, push boundaries and take risks in ways that the private sector alone would struggle to do.
Many factors can determine the risk of individual projects—sector-specific factors, the strength of sponsors, the financing instrument, product cycle, market developments, currency, governance and policy risks. The country composition of IFC’s portfolio, which is the focus of CGD’s analysis, does not in itself reflect IFC’s risk profile, nor our willingness to take risks. CGD concludes that IFC is not taking enough risks by looking at geographic trends. That approach incorrectly conflates country composition and portfolio risk. The majority of IFC’s projects have a risk profile below investment grade—consistent with IFC’s mandate and strategy in emerging markets.
We’re proud of what we’ve accomplished over 61 years. More than any other international finance institution, we’ve invested in private sector development in the poorest countries and those affected by conflict. It’s true that we need to do much more. And we will.
First off, thanks to Fred and the IFC for replying. The Corporation has a unique role to play in global development finance and we’re keen for that role to grow, so we’re happy that the report has generated so much conversation about IFC’s portfolio, both within and outside IFC. And second, we commend IFC for its plans to do more in poor countries and those that are classified as fragile states—it is where the Corporation can have the most impact and where it is most needed.
Third, we agree that the IFC has an important place in middle income countries, but we would argue for a greater focus on the countries that are home to two-thirds of the world’s poor—lower-middle income countries. We are disappointed to see (as reported in Figure 8 in our paper) a declining share of IFC investments as a percentage of recipient country GDP in both low-income and lower-middle Income countries. That is matched by data suggesting a declining share of total IFC commitments going to those countries compared to others: in 2006, $4.2 billion out of $6.9 billion of IFC commitments (three fifths) went to low and lower-middle income countries, in 2016 $2.6 billion out of $7.4 billion of IFC commitments (a little more than one third) went to low and lower-middle income countries (Figure 7 in our paper). Meanwhile, we estimate Turkey, China and Brazil between them, all upper middle income, received just shy of $10 billion in IFC investment between 2013 and 2016 alone.
Finally, we’re sure that IFC projects in middle-income countries do not replicate what the market does anyway and (so) that the country composition of IFC’s portfolio, which is the focus of our analysis, does not fully reflect IFC’s risk profile. We focused on country risk because that was what we could look at by collating and analyzing the information currently available on IFC’s website. But if overall IFC risk has stayed the same while country risk has declined, it does imply the Corporation has decided to take on projects in countries like China and Turkey that are risky compared to most investments in those upper-middle income countries rather than projects in low and lower-middle income countries that are comparatively safe compared to most investments in poorer countries—and we wonder about the tradeoff in terms of meeting development objectives.
And that discussion brings us back to our key point about transparency: the IFC now publishes the data we scraped in a more usable format, which is a great first step. And we would be very pleased to carry out a separate and more detailed analysis of IFC’s portfolio risk if the right data were publicly available. For an institution that relies on public funding (and is now involved in disbursing aid), the lack of user-friendly public data on its activities is a growing issue. But the good news is we think the IFC has the capacity—and perhaps even the willingness—to fix the problem.