Background: What is this G20 EPG about?
(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.