A recent CGD paper and the World Bank’s response focused on precisely how much financial support the Bank is likely to provide this year to low- and middle-income countries (LMICs) and whether this would match with targets the institution set for itself at the start of the COVID-19 pandemic. The back and forth on numbers risks obscuring a larger issue: The World Bank, and other multilateral development banks (MDBs) for that matter, are unlikely to pull out the stops in their response to this once in two generations crisis unless they get clear guidance from their major shareholders to do just that. The evidence suggests the rich country shareholders on whom the Bank depends for financial support are not sending this message. Indeed, some have signaled quite the opposite. US Treasury Secretary Mnuchin was most explicit in calling upon the World Bank to “manage financial resources judiciously and transparently […] so as not to burden shareholders with premature calls for new financing.” Other major shareholders conveyed the same message in private.
Mixed messages from shareholders reinforce an innate conservatism within the MDB system. When pushed to be more forward leaning in deploying their concessional and non-concessional resources, three counter arguments are often advanced in favor of a more measured approach. First, a simple mandate argument: the MDBs are not emergency responders, this is more the business of the International Monetary Fund (IMF). The MDBs should instead focus on aiding the recovery with good development programs. Second, this crisis is going to take a long time to overcome and LMICs will need enhanced financial support over an extended period; it would be imprudent to use up limited lending capacity too quickly given the journey ahead. Third, the development agenda includes additional initiatives outside the COVID-19 response and while we should certainly provide some support to help deal with this crisis, we cannot divert too many MDB resources from other vital development goals.
A related strand is the “never waste a good crisis” maxim: Since developing countries are under unprecedented financial strain because of the crisis, this is the moment to condition financial assistance on difficult economic reforms some countries might have been unwilling or unable to undertake in normal times. This approach would also tie the money a country receives to the strength of their economic policies more than how badly they were impacted by the crisis. The timeline of assistance takes second place to how effectively it can be used to leverage economic reforms.
The trouble is these are not normal circumstances. The facts are now undisputed: this is the worst economic crisis for developing countries in fifty years.
There is some merit in all these arguments. In normal circumstances they provide a line of defense against short-term pressures to get money out of the door without adequate regard to the longer-term consequences. The trouble is these are not normal circumstances. The facts are now undisputed: this is the worst economic crisis for developing countries in fifty years. The crisis will set back development progress for a decade and push over 100 million people into absolute poverty and many more to near that state. The resulting shutdowns have disrupted schooling for 1.6 billion children, some of whom will never go back to a classroom, leading to a generation of adults whose lives will fall short of their potential. Unlike the rich countries, LMICs have neither the reserves nor the borrowing capacity to spend their way out of the recession. The public finances of donor countries are themselves reeling from the after effect of their unprecedented ramp up in domestic crisis fighting spending, so a meaningful increase in overseas aid is not in the cards. And, getting private investors to overcome their flight to safety and risk aversion will be hard in emerging markets and even harder in low-income countries.
The inescapable conclusion is that for the next five years the world will need to rely on the financing power of the MDBs, institutions that were created with the express purpose of accelerating development progress and which are uniquely placed to help developing countries mitigate the worst effects of this crisis. This is particularly the case for low-income countries, which have the smallest pool of domestic resources and the most limited access to financial markets. Advanced economies were able to spend nearly 20 percent on average of their annual GDPs on fiscal stimulus while emerging markets were able to spend less than six percent and lower income countries only about two percent.
And yet, on the current trajectory, the best we can expect is an uneven and temporary increase in MDB lending before it reverts to pre-COVID-19 levels in 2022 onwards, precisely when developing countries will most need affordable funding to underpin their hard recovery. While the World Bank has promised $160 billion by 2021 for the COVID-19 response, just over $20 billion has actually been disbursed. This ‘business as usual’ path may be comforting for the institutions and their rich country shareholders, but it would be at best a missed opportunity of historic proportions and the consequences would impact us all for a generation to come.
It is entirely feasible, and I would argue, necessary, for the MDBs to play a much larger role during this critical time. At a time when global financial markets are awash in liquidity and risk free interest rates are hovering around zero, these institutions, which enjoy the AAA backing of the most creditworthy countries, could more than double their new commitments to about $250 billion for each of the next five years. Within that total, their concessional funding for the poorest countries could also see a commensurate increase.
The ramp up of MDB operations would be achieved through a modest tweaking of their historically conservative financial models as well as an equally modest contribution from rich countries to augment their capital and concessional lending capacity. To those who would object that rich country budgets cannot afford this additional call, it is important to point out that replenishing the capital of MDBs generates 5-7 times more lending capacity than providing those funds directly to developing countries. Similarly, a commitment to bring forward the next replenishment of, for example, IDA (the World Bank’s concessional lending window) will provide exactly the kind of comfort that would enable the World Bank to access financial markets to scale up IDA operations in the near term.
Doubling MDB commitments for each of the next five years will not be all that is required to help developing countries avoid the worst of already tragic outcomes. For a start, MDB funding will need to be accompanied with technical and policy advice on the shape of the post-COVID-19 economy. For another, complementary funding and advice from the IMF will be essential to restore macroeconomic stability. And these organizations will need to work with official and private creditors to address the problem of excessive debt that risks crippling the recovery for several poor countries.
Finally, the MDBs can work much more closely with the 450+ national and regional development banks with local knowledge and $10 trillion plus balance sheet which have been underutilized assets in the global development agenda. Alongside MDBs, national and regional development banks have invested $1.5 trillion in middle income countries since 2018. Given their current balance sheets, they could step up their investments to developing countries significantly.
We have known for months that the current international response to the COVID-19 crisis has been woefully inadequate and are in mocking contrast to the spend-what-it-takes approach the rich countries have rightly adopted at home.
None of the mentioned facts or analyses are new. We have known for months that the current international response to the COVID-19 crisis has been woefully inadequate and are in mocking contrast to the spend-what-it-takes approach the rich countries have rightly adopted at home. We also recognize the untapped potential of the MDBs as part of a more appropriately sized global response. What we have lacked is political leadership by a coalition of MDB shareholders to both ask the development banks for a more ambitious plan of action and assure them of the necessary backing to make the plan a reality.
In this area, as in so many others, the United States plays a pivotal role. So far, that role has been to moderate expectations and tone down ambition. With a new administration set to take office in a couple of months, US leadership can forge a much more credible international financial response to the COVID-19 crisis. Doubling the contribution of the MDBs over the next five years needs to be a critical part of that response.