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International Financial Institutions (IFIs) and particularly the relationship between the IFIs and the United States.
Scott Morris is a senior fellow at the Center for Global Development and director of the US Development Policy Initiative. This initiative seeks to broaden the US government’s approach to development, including the full range of investment, trade, and technology policies, while also strengthening existing foreign assistance tools. Additionally, he works on issues related to the International Financial Institutions (IFIs) and particularly the relationship between the IFIs and the United States. Morris served as deputy assistant secretary for development finance and debt at the US Treasury Department during the first term of the Obama Administration. In that capacity, he led US engagement with the World Bank, Inter-American Development Bank, African Development Bank, EBRD, and Asian Development Bank. He also represented the US government in the G-20’s Development Working Group and was the Treasury’s “+1” on the board of the Millennium Challenge Corporation. During his time at Treasury, Morris led negotiations for four general capital increases at the multilateral development banks and replenishments of the International Development Association (IDA), Asian Development Fund, and African Development Fund.
Before his post at the US Treasury, Morris was a senior staff member on the Financial Services Committee in the US House of Representatives, where he was responsible for the Committee’s international policy issues, including the Foreign Investment and National Security Act of 2007 (the landmark reform of the CFIUS process), as well multiple reauthorizations of the US Export-Import Bank charter and approval of a $108 billion financing agreement for the International Monetary Fund in 2009. Previously, Morris was a vice president at the Committee for Economic Development in Washington, DC.
Lost in all of the noise of the post-Lehman crisis response was an important structural shift in the international development landscape: a much bigger footprint for the regional development banks relative to the World Bank.
Starting in 2009, the G20 pursued a number of measures to help developing countries weather the crisis, one of the most visible of which was an agreement to have the multilateral development banks (MDBs) lend aggressively into the crisis, paired with the commitment of new capital from the institutions’ shareholders in subsequent years.
The result was an unprecedented series of capital increases for the World Bank (IBRD), Asian Development Bank (AsDB), African Development Bank (AfDB), and Inter-American Development Bank (IDB), within an 18 month period. All told, the G20-led effort increased the collective capital of these four institutions from pre-2010 levels of $379 billion to $712 billion after the crisis.
Less noticed in this set of actions was the relative allocation of capital among these institutions. With the G20 playing a soft coordinating function, the MDBs’ shareholders made a clear shift in favor the regional development banks over the World Bank. These figures tell the story.
Before 2010 the regionals as a group accounted for just half of the $379 billion in MDB capital. After the 2010 capital increases, they accounted for 61 percent of the $712 billion in capital.
Nothing in G20 declarations at the time or statements within each of the MDBs point to a deliberate snubbing of the World Bank. Rather, the decisions reflected a more affirmative stance toward the regional institutions, as well as a more aggressive posture coming from the leadership of these institutions – which is to say, they asked for more money than the World Bank did. And they got it.
In each case, the regionals made the case that they could operate just as effectively as the World Bank and were better aligned with the interests of the client countries within their respective regions.
Nowhere were these dynamics more evident than at the AfDB, which won a tripling of its capital base. After years of struggle, the institution had emerged in the mid to late 2000s with globally-respected leadership, a series of policy reforms aimed at matching World Bank “best practices,” and critically, an aggressive case about its particular credibility in the region. The direct ties to the region, reflected in the headquarters location and composition of the staff, also influenced the AfDB’s programming in a way the bank’s shareholders found compelling, particularly as a matter of mission focus and willingness to say “no” to sectors and initiatives that didn’t directly align with a regionally-driven agenda.
With the implementation of a major new strategy at the World Bank today, there has been no shortage of unfavorable comparisons in play: the World Bank relative to BNDES; the World Bank relative to Chinese investment in Africa; the World Bank relative to global remittance flows. These comparisons typically are designed to either write the bank’s obituary or rally the institution for a bigger, bolder future.
I’m certainly not ready to write the World Bank off, and I do think there’s a strong case for bigger and bolder. But that case applies to all of the MDBs. The World Bank doesn’t need to be quite so dominant a presence among these institutions in order to be a more effective presence globally.
So whatever the future might hold for capital increases at the World Bank, the G20 would do well to continue to think of all of the MDBs as pieces of a whole, just as they did in 2009/2010.
 At the same time, the bank’s very commitment to be permanently headquartered in Cote D’Ivoire has been the source of considerable disruption and risk for the institution over the past decade, including in its ability to recruit and retain staff.
The Australians are using their G-20 presidency to make a fresh start with the group’s infrastructure agenda, launching a new “Infrastructure and Investment” working group this week in Mexico City.
And not a moment too soon. A recent CGD study group Scott chaired concluded that this highly compelling agenda risks becoming a stale one absent some new approaches.
Our group came up with five new ideas, some big, some small, but all aimed at helping the G-20 have a demonstrable impact on meeting developing countries’ infrastructure needs. (Read this note for the full explanation.)
1. Commission a new global knowledge product for infrastructure investment, the “Investing in Infrastructure” survey. While “Doing Business” and other surveys have done a good job informing us how the lack of roads, ports, etc. are barriers to growth, this country-level survey would identify policy and regulation changes that could ease the challenges of actually investing in and building that infrastructure.
2. Cultivate a new generation of infrastructure investors by launching a sustained engagement with the pension fund community. With the long term investment horizon of pension funds and the long term returns of infrastructure projects, the two are a good match to meet development goals. But so far, a lack of practical engagement has left the estimated 20.7 trillion managed under pension funds untapped.
3. Unlock the project preparation process by focusing on the right role for public funding. Many infrastructure projects get stalled early on, due to lack of government capacity and mismatched funding opportunities for project preparation. Restructuring support for country governments to package and negotiate projects would catalyze infrastructure investment from its earliest stages.
4. Make a sustained commitment to the multilateral development banks. The emphasis on private sector involvement should not come at the cost of core support to the MDBs. Revisiting a one-time commitment to capital increases and coordinating on policy agendas could renew the effective leveraging of MDB capital for infrastructure.
5. Launch a new agenda on sovereign debt (particularly sub-national debt). Studying and addressing the uneven and confusing credit worthiness standards, which prevent many developing countries from accessing global bond markets, will help developing countries raise their own financing for infrastructure while appropriately managing the risks.
We hope these suggestions will help Australia make the most of the G-20’s infrastructure for development agenda this year and going forward. Working together with priorities already being set by developing nations, an engaged and “concrete” effort by the G-20 to strengthen infrastructure could catalyze growth and prosperity for all.
Ok, before you answer that second question (don’t click away yet!), let me try to convince you that new papers by Devesh Kapur and me on this seemingly weedy topic actually speak to some far-reaching and fundamental issues facing the world’s largest development institution.
Coincidentally, Devesh and I found ourselves contemplating the same problem at the bank a number of months ago. Namely, how can the World Bank break out of existing constraints — financial, governance, political — to become a larger and more relevant institution? Or to put it negatively, how can the World Bank avoid shrinking into obscurity on the world stage, which may very well be the path of the status quo?
Of course, we’re not the only people thinking about these issues. They’re certainly on Jim Kim’s mind. A major component of his new strategy for the institution seeks to overcome some of the financial constraints that currently exist.
While Devesh and I have the same starting point, we arrive at different recommendations. And while our recommendations are not mutually exclusive, where we part ways is in our assessment of the bank’s ability to raise capital from its shareholders.
Interestingly, we share common cause against the current thinking within the World Bank, which seems to rule out any consideration of the bank’s own shareholders as a source of future capital.
Devesh wants to provide a mechanism, via contingent capital, that would tap the resources and will of the countries that have been most vocal in making a case for a bigger capital base (and bigger World Bank). In his estimation, large emerging-market countries are prepared to step forward with more capital, and he offers them a mechanism to do so.
I’m all for more capital from China, India, and Brazil, but I don’t want to write off the United States, France, and Germany in the process. In fact, given the right mechanism, in my case a “Bank Resource Review,” I think the bank’s largest shareholders could be amenable to new funding for all the arms of the institution (IBRD, IFC, IDA, and MIGA) as a transition away from IDA-focused replenishments.
Both of us are motivated by a desire to see a larger institution, and we both gravitate to the bank’s shareholders as the lynchpin. I, for one, am worried that World Bank management doesn’t yet seem to be looking to shareholders to play this role, preferring instead to cut budgets and chase private capital.
Here’s hoping that these twopapers can help put some of the focus back on the World Bank’s shareholders.
President Obama delivered his 2014 State of the Union speech Tuesday, January 28. Before the speech, we polled CGD experts to find out what they hoped to hear from from the president's address. Check out their oratorical contributions below and read about the development-related decisions and policies they would like to emerge in support of the rhetoric.
You may not be surprised that development didn’t feature prominently in the president’s speech. However, we were pleased to hear references to inequality, the economic benefits of immigration, climate, and trade, if not necessarily with the development lens offered by CGDers below. We were also thrilled to hear the shout-out to Power Africa (oh, and to Mad Men).
President Obama will deliver his 2014 State of the Union speech Tuesday, January 28. We polled CGD experts to find out what they’re hoping to hear when the president addresses Congress and the nation. Check out their oratorical contributions below and read about the development-related decisions and policies they would like to emerge in support of the rhetoric.
“Last year I called for an end to extreme poverty in the world by 2030. That end is in our sights. But inequality is rising not only here in the United States, but in China and India, in Europe and in Africa. To achieve real progress in tackling this pernicious challenge, we need to put the fight against inequality on our global agenda, as well as our domestic one.”
The president is justifiably concerned with growing inequality and declining social mobility in the United States. In the developing world, inequality remains a serious problem and one increasingly associated with a worrying cycle in which high concentrations of economic wealth corrupt political systems, and in turn feed rent-seeking by privileged insiders. Protests this year in Turkey, and in Brazil and Chile (countries where inequality is falling but remains very high), and the rise of resurgent extreme right parties in Greece and Spain signal citizens' growing frustration with economic policies that seem to sustain rather than fight that cycle— whether intentionally or not. The president can send a critical message, at no cost in budget terms, about American democratic values and commitment to inclusive growth around the world -- simply by referring to inequality as a global political as well as economic challenge. Follow-up should include revisiting the position of the United States on the framing of a post-2015 development agenda, as well as revitalizing support at the upcoming G20 summit for toughening up measures on tax cooperation and reduction of cross-border tax abuses already agreed to by the G-8 last year.
“The US economy was built by the hard work of immigrants and today immigration is more important than ever. But Silicon Valley does not run on engineers alone. It also runs on nannies, janitors, farm workers, and dish washers. Immigration reform that creates safe, legal pathways for low-skill migration will contribute to the recovery and continued sustained growth of our economy, prevent future crises of unauthorized immigration, and foster global development in ways that go beyond traditional aid.”
Over the next decade the US economy will need more than 5 million new low-skill workers for jobs like health aids, nannies, food services workers, and landscapers—jobs that require less than a high-school education, and can’t be off-shored or mechanized. Over this same period, just 1.7 million Americans will enter the labor force, only a small fraction of them without a high school diploma. The country needs a way for economically essential migration to take place legally. Filling those essential jobs is critical for our economic recovery and continued economic growth, because they directly complement higher-skill workers and make all of us more productive. This is why immigration reform that includes a robust temporary low-skill worker program, like the W-Visa program in the immigration bill passed by the Senate last year, is good for the American middle class. Meeting American firms’ demand for these low-skill workers will prevent future flows of unauthorized immigration, and expanding opportunities for temporary work in the US will have development benefits that far out size what traditional aid can offer—and at no fiscal cost to US taxpayers.
“I am calling on Congress to pass legislation that will ensure continued US leadership in the IMF, a vital partner to America’s economic interests. Congressional inaction undermines US interests in an institution that plays a critical role in combatting deeply damaging financial crises globally, helps to ensure a level playing field for US workers and companies around the world, and works with us to root out the financial seeds of terrorism.”
The United States badly needs a win on the international economic stage. In a year when the global community decided to go big in support of IDA, the World Bank’s fund for the poorest, the United States decided instead to go big on the Global Fund to Fight Aids, Tuberculosis, and Malaria. As a result, a substantial chunk of the United States’ NPR-style matching pledge to the Global Fund went unmatched, and the champions of IDA this time around were countries like the UK and China (China!). But nowhere in the international economic sphere is the United States more visibly out of step with the rest of the world than on IMF reform, where the US is singlehandedly holding up a hard-won agreement due to congressional inaction. Just a few months ago, President Obama weighed in personally on behalf of the Global Fund, making a direct appeal to other donors. It’s time for him to put his voice to the need for Congress to act on the IMF.
“American taxpayers deserve to know the government spends their hard-earned money. My Administration has taken steps to make accessing data on government spending faster and easier, but we can do more. I will instruct the Office of Management and Budget to publish the full text of all government contracts and task orders online at USAspending.gov, in a fully searchable database, and to develop new guidelines consistent with the Freedom of Information Act that will provide specific guidance on commercial and national secret exceptions.”
US taxpayers fund government contracts with the private sector that are worth hundreds of billions a year. They have a right to know what they are paying for, and there is plentiful evidence that greater transparency in the contracting process can lead to better outcomes in terms of price and quality. A number of other countries from Colombia to Slovakia to the UK already publish government contracts online. In the United States, you can access government contracts using a Freedom of Information Act request, but it can be a long, painful process and the rules governing what counts as ‘commercial secrets’ within a contract are vague enough that the released, redacted document is sometimes more black marker than text. The US should join a growing global movement towards contracting transparency-–and an Executive Order could make it happen.
“Stopping the loss of tropical forests is one of the most urgent, affordable, and feasible actions the international community can take to avert catastrophic climate change. The United States will provide meaningful rewards to those countries and companies that demonstrate success in reducing deforestation.”
Greenhouse gas emissions from tropical deforestation are our emissions too: forests are being cleared to make way for production of the food, fuel, and fiber that US citizens consume. But there are practical solutions to decouple production from deforestation, including policies being put into place by the governments of forest countries to improve law enforcement and forest management, and commitments from private companies to rid their supply chains of deforestation. The United States should join Norway and Germany in allocating aid funding to reward governments that successfully reduce deforestation with “Cash on Delivery.” As part of its contribution to the Tropical Forest Alliance, the US should ensure that the Lacey Act--designed to prevent the import of illegally-produced forest products-- is fully funded and aggressively implemented, and that federal procurement standards are “greened” to create markets for products certified as deforestation-free.
“We will ensure that our anti-tobacco policies are supported—not subverted—by our trade policies, and strengthened by our investments in aid.”
The United States invests billions each year to address some of the most pressing health challenges around the world, but more can be done to ensure that US policies on international trade back up this commitment to global health. Globally, deaths from tobacco use each year exceed the number of deaths from HIV/AIDs, TB, and malaria combined. At home, the United States has enacted smart policies and made tremendous progress against tobacco-related deaths--efforts that should be ‘exported’ and replicated around the world. Failure to stand up to the big tobacco bullies will make it more difficult for these countries to enforce anti-tobacco policies like package warnings and advertising restrictions, and will undermine the United States standing as a leader in global health. Further, the United States should do more to ensure that organizations like the World Bank and the IMF that have a mandate to modify taxes and subsidies, support countries in increasing tobacco taxes and cutting tobacco subsidies, saving both lives and money.
“We know trade is vitally important to our economy, but it is also a critical tool to reduce global poverty. As the United States continues to make progress negotiating with our trade partners across the Pacific and the Atlantic, we must ensure that these agreements benefit US workers and consumers but do not undermine our efforts to promote development in low-income countries or weaken the multilateral trade system that is so crucial to global prosperity.”
Negotiations across the Pacific and with the European Union will no doubt dominate the US trade agenda this year. The greatest risk for smaller, poorer countries is that these “mega-regional” deals will weaken the World Trade Organization and leave those countries with no refuge from discrimination and bullying by more powerful trader partners. Some poor countries, particularly Bangladesh and Cambodia, could also see their exports fall as a result of more favorable market access granted to competitors that are included in these deals, such as Vietnam.
To guard against the risk of undermining multilateralism, President Obama needs to be equally committed to ensuring that ongoing negotiations and development of a work program at the WTO are successful. In particular, US negotiators should push for a food security package that reduces or eliminates rich country agricultural subsidies, reforms food aid, and develops new rules that give developing countries the tools they need to pursue food security goals without distorting global markets. And, to mitigate the potential for trade diversion, President Obama should work with Congress to reduce barriers to trade with the world's poorest and most vulnerable countries.
“My Administration will work closely with Congress to extend trade legislation with Sub-Saharan Africa, negotiate new investment treaties, and significantly expand our efforts to promote more US investment in this important region, particularly in the power sector. Increasing our engagement will yield benefits to US businesses and put more Americans to work. And I look forward to finding additional opportunities for partnership this coming August, when I will host the first ever US-Africa Summit with leaders from 47 African nations.”
This past week, the White House formally announced that President Obama will host leaders from 47 African nations in early August. The summit agenda will focus heavily on promoting trade and investment ties with the region. These interests reflect the continent’s rapid economic growth over the last decade and widespread improvements in macroeconomic management and governance (despite pockets of instability and ongoing challenges in places like South Sudan and the Central African Republic). In the interim, the Administration and Congress will be considering a number of important programs and policies. First, both branches will be determining whether (and how) to extend the African Growth and Opportunities Act, which provides preferential US market access for qualifying countries. Second, the Administration will continue efforts to conclude bilateral investment treaty negotiations with the East African Community. Third, the Administration will continue implementation of its Power Africa Initiative, which seeks to expand electricity access for 20 million households. A presidential reference to these three efforts will be important for either getting them over the finish line (in the case of AGOA and the US-EAC BIT) or putting pressure for early and concrete results (for the Power Africa Initiative).
Beyond this, the US government should also take further steps to promote greater trade and investment ties with Sub-Saharan Africa, including: (1) unleashing the Overseas Private Investment Corporation; (2) expanding select USAID programs focused on unlocking private capital for development, such as the Development Credit Authority; and (3) announcing a new strategy for improving the impact and coherence of US trade capacity building programs.
In a few days, the US government will move to officially oppose any and all large hydroelectric projects funded by the multilateral development banks, even as USAID considers bringing the mother of all hydroelectric projects, “Inga 3”, into the high profile “Power Africa” initiative.
Opposition to big hydro will be a matter of law when Congress passes the Consolidated Appropriations Act of 2014 in the days ahead. Here’s the provision:
Section 7060(c)(7)(D). The Secretary of the Treasury shall instruct the United States executive director of each international financial institution that it is the policy of the United States to oppose any loan, grant, strategy or policy of such institution to support the construction of any large hydroelectric dam.
This comes on the heels of USAID administrator Raj Shah’s indication a few weeks ago that USAID might participate directly in the $13 billion Inga 3 hydroelectric project in the Democratic Republic of the Congo.
Does the new law prohibit USAID participation in Inga 3? Actually, no. It only pertains to the US position in institutions like the World Bank and African Development Bank.
But “only” is misleading here. USAID, in spearheading Power Africa, is depending critically on these two institutions to provide much of the financing and capacity that will make Power Africa projects a reality.
The trick of Power Africa will be to use relatively little traditional US government aid money (in short supply these days) to leverage funding from other sources (private investors, partner governments, and the multilateral development banks).
At a minimum, pulling off this kind of leverage depends on a clear and consistent policy position from the United States.
When it comes to hydro, we now have the opposite of that. Yes, USAID might proceed with putting a little bit of money into a high priority regional energy project like Inga 3. And they will no doubt take great interest in the progress the World Bank and African Development Bank are making in their own participation in Inga 3. But when it comes to official US support for this participation? It doesn’t appear to be in the cards anymore.
Pursuit of hydro power figures prominently in the African-led Program for Infrastructure Development in Africa (PIDA), reflecting the remarkable potential of hydro for delivering power to the region. The African Development Bank estimates that 95% of the region’s hydro potential remains untapped.
Large scale hydro remains more vision than reality in Africa because it carries considerable financial, social, and environmental risks. Certainly, the opposition to hydro from some (well-placed) parts of Congress reflects concerns about population resettlement, water use, and environmental impact.
Unfortunately, the very institutions that are best positioned to work with the region’s governments to manage these risks are now off limits when it comes to US support.
Interestingly, where Congress went in one direction on one controversial energy source, it went in the opposite direction on another. Another provision in the spending bill essentially seeks to reverse the administration’s restrictions on financing for coal in developing countries.
So, when it comes to Power Africa (and beyond), apparently it’s yes to fossil fuels and no to hydro. Good luck trying to find a coherent message in all of this. I certainly can’t.
 As a legal matter, this particular construction (“…it is the policy of the United States…”) leaves some discretion to the Treasury secretary. That said, this particular directive is so unambiguous and lacking in qualifiers that the secretary will be hard pressed to issue a voting position that contradicts the statement of policy.
The World Bank just successfully raised $52 billion for the International Development Association (IDA). What better way to build on that success than to declare IDA fundraising dead?
Do something every three years for over five decades and you become pretty good at it. Thus, the World Bank just announced another record-breaking fundraising effort for IDA, following the conclusion of the seventeenth replenishment (“IDA-17”) of the bank’s fund for the poorest countries. These triennial fundraisers are elaborate, year-long efforts that have secured IDA’s long standing position as the largest source of grant-based financing for low income countries.
But in a new essay, I argue that the World Bank risks being captured by this highly successful fundraising model at a time when the institution needs a new approach to engaging with its shareholders.
The needs of the World Bank’s client countries are changing. IDA countries are becoming IBRD countries, easing the future demands on IDA and increasing the demands on the other arms of the bank. It’s very hard to reconcile this trajectory, and the changing financing needs it implies, with an institution that continues to shake down donors for huge amounts of grant support for IDA while politely agreeing that capital increases for the rest of the institution will only be once in a generation events.
By declaring IDA-17 the last replenishment, the World Bank can move to replace it with a broader effort that takes the best features of the IDA fundraising model and applies them to a new “bank resource review” (BRR).
The new BRR, in fact, would look a lot like an IDA replenishment, with a year-long series of negotiating sessions that are heavy on policymaking and agenda-setting, alongside a consideration of financing needs. The key difference would be one of scope. The BRR would consider these things for the World Bank Group as a whole – yes IDA, but also the IBRD, IFC, and MIGA.
Bringing these elements together into a common exercise would support existing efforts to tear down silos in the bank, better rationalize policy setting across the bank’s functions, and of course, provide a more rational basis for considering financing needs for the bank as a whole.
Yes, the BRR would make it easier to tee up future capital increases for the IBRD and IFC, and at first glance, this may not sit well with the non-borrowing members of bank. But the BRR would also allow for a more flexible allocation of contributions, even if overall contributions stay the same or decline. The Europeans and Americans need not worry about growing claims on them from the bank under a BRR, just a different (and better) allocation of the existing claims over time.
So far, radical thinking on the World Bank’s fundraising model, at least when it comes to fundraising from the bank’s shareholders, has been noticeably absent from an otherwise aggressive reform agenda. The bank’s leadership should move now to change that.
So, congratulations to the World Bank for a successful IDA-17. Now, let’s move on to BRR-1.
The World Bank should declare the IDA-17 replenishment its last and move to replace it with a broader bank resource review. Sticking with the status quo risks an underfunded institution and one that is increasingly isolated from its shareholders (yes, that would be a bad thing).
President Obama earlier this week made a last minute appeal to donors to the Global Fund to Fight AIDS, Tuberculosis and Malaria. Offering a US pledge of $1 for every $2 pledged by other donors for a total US pledge of up to $5 billion, the president said, “don’t leave our money on the table.” Well, the initial commitments are in, and it appears that there will in fact be US money left on the table. Donors to the Global Fund announced total pledges of $12 billion, suggesting a US commitment of about $4 billion.
So what happens to that “left over” $1 billion, assuming other matching donors don’t come forward? Most likely, it will be subsumed in the PEPFAR budget, ensuring that US foreign assistance continues to be largely bilateral and largely focused on global health issues.
Here’s a better idea. In just a few weeks, the United States and other donors will be gathering for another pledging exercise, this time to replenish the coffers of the International Development Association (IDA), the World Bank’s fund for the poorest countries. And while the IDA replenishment session (to be held in Moscow) may not garner the attention that the Global Fund replenishment did, IDA itself plays a critical foundational role in poor countries’ development efforts in a way that extends beyond a single sector or initiative. Yes, IDA does health, but it also does jobs, energy access, and infrastructure, among other things.
If this list sounds familiar to CGD readers, that’s because these are the very priorities stated by ordinary Africans in Ben Leo’s important new work. Using survey data, Leo shows that US spending in Africa is badly misaligned with Africans’ own priorities. And while he didn’t compare US spending to IDA spending, IDA programming tends to look a lot like that of the African Development Bank in its strong alignment with the priorities of low income countries.
Unfortunately, the US ambition on display for the Global Fund this week is proving harder to come by for IDA. For IDA insiders, the prevailing view of a good US pledge is a zero growth scenario of $4 billion, with real concern that the US pledge could actually fall.
So why not avoid that outcome by using some of that left over Global Fund money?
As I discussed in an earlier post, there are long standing structural problems in the US foreign assistance budget that stand in the way of better coordination around decisions of how much to give to IDA versus the Global Fund.
But it might just be the case that a simple coincidence of timing can cut through all of that in favor of a good outcome. What needs to happen? Already, I suspect that Treasury Secretary Lew and OMB Director Burwell are hammering out the details of an IDA pledge. So why not bring Secretary Kerry into that conversation and strike a deal that ensures US leadership in the world’s largest development institution, a goal they all should share.
Ben Leo’s new report asks pointedly, “Is anyone listening?” A US pledge to IDA of $4.25 billion or $4.5 billion would allow the administration to say emphatically, “yes, we are listening.”
The IMF, World Bank, EBRD, and the European Investment Bank have all emerged as significant players in the dramatic events in Ukraine in recent weeks. The Obama administration has very visibly sought to educate Congress on the central role of the IMF in helping to shore up the country’s shaky economy. And the three development banks have figured prominently in press releases coming from the European Union and the United States as a demonstration of the international community’s support for Ukraine’s interim government.
While each of the international financial institutions (IFIs) has already signaled its willingness to support Ukraine, it’s worth considering further their ability to act in concert, not only to shore up Ukraine’s economy, but to bolster the new government’s commitment to democratic and accountable governance and to reinforce international principles of national sovereignty and territorial integrity.
Achieving all of this will require an approach of carrots for Ukraine and, perhaps more controversially, sticks for Russia, an argument that Martin Wolf makes very effectively in the FT this week. I take that general approach and apply it here to the role of the IFIs.
Carrots for Ukraine
These institutions, with the international community behind them, need to deliver on two things when it comes to assistance for Ukraine: quick and large scale financial commitments, and a credible, sustained engagement that ensures the delivery and effective use of this financing. The interim government needs an immediate and strong commitment from the IFIs in order to shore up domestic support for a reformist agenda, and sustained IFI engagement increases the chances that this agenda will succeed.
Of course, the quick show of support has already happened to some degree with announcements of an EU-led $15 billion package (which includes EBRD and EIB commitments), $1 billion loan guarantee from the United States, $3 billion from the World Bank, and a commitment from the IMF to support Ukraine (with Ukraine’s government seeking $15 billion from the fund). All told, that’s potentially just shy of $35 billion.
But more could be done to increase the scale of assistance. For the World Bank, “more” is matter of signaling large scale financing on a multi-year basis, making clear that the new $3 billion commitment is just the starting point. For the European institutions, they should be pressed to test the limits of any prudential concerns that arise with concentration risk in a dicey Ukrainian economy. As I noted previously, it’s troubling that the EBRD’s current offer represents a slight decrease from the bank’s level of assistance under the old regime, a regime that demonstrated no willingness to implement the types of economic and governance reforms that would decrease overall investment risk in Ukraine’s economy. With a new government signaling its willingness to tackle these issues, the EBRD should show more ambition in return.
Of course, the IMF will be in a stronger position to deliver adequate support for Ukraine if the US Congress acts on IMF quota reform, which will increase the amounts Ukraine (and other countries) are eligible to borrow.
But delivering on the promises of donor and IFI press releases will also require sustained and effective IFI engagement with the government as the reform agenda is implemented. For Ukraine, economic reform means energy subsidy reform, which carries tremendous political risk for the government, even if it’s handled well.
The IMF’s ability to make subsidy reform and fiscal consolidation politically possible for the new government will depend critically on the ability of the World Bank and other development institutions to provide a strong backstop to the country’s social safety net.
Moving these pieces together in a timely manner has proved challenging historically. As a result, there is a fair amount of cynicism toward the United States, its allies, and the IFIs in these situations, with charges that announcements of large financing packages rarely deliver as promised. Certainly, the experience of the Arab Spring and efforts of the US and Europe to play a major financing role in support of fledgling democracies points to a more complicated story, but one that can also feed that cynicism.
So if the major shareholders of the IFIs are to use these institutions to mobilize large scale financing for Ukraine, then they must also be diligent in seeking to ensure that the IFIs are working effectively with each other and the Ukraine government on a reform agenda that supports the economy, generates jobs, and ultimately reinforces the country’s commitment to democratic governance.
Sticks for Russia
Using the IFIs to deliver carrots to Ukraine should not be particularly controversial. Seeking to punish Russia for its actions in Crimea is a different matter.
What would an IFI “stick” applied to Russia look like? Simple: the IFIs that are providing financial assistance to Russia would stop. That means the halting of World Bank support of about $100 million a year through the IBRD and $1 billion a year through the IFC, EBRD support of about $3.5 billion a year, and EIB support that has totaled over $2 billion in the past decade.
Well, not so simple actually. As I noted in an earlier post, the one institution among them that has a legal basis, requirement even, not to support undemocratic regimes also has Russia as its largest client. For the World Bank and EIB, there is no such “democracy” mandate. And the World Bank has argued for many years that it has a legal mandate not to interfere in the “political affairs of any member.”
But what about when one of its members interferes in the political affairs of another of its members? Unfortunately, short of UN sanctions (Russia made sure that wasn’t going to happen) there seems to be little in the way of punishment the MDBs can exact under a strict interpretation of their rules.
While the World Bank institutionally may hew to a legalistic conservatism in these matters, World Bank presidents have on occasion used the considerable power of their office to take action. Most recently, Jim Kim very publicly halted bank lending to Uganda in reaction to the country’s crackdown on the rights of homosexuals. And Bob Zoellick earlier caused a stir when he applied public pressure on Cote D’Ivoire’s Laurent Gbagbo to recognize the outcome of the 2010 elections and step down.
And in the past two years, a number of the IFIs’ shareholders have sought to withhold support for Rwanda in the wake of a UN report that alleged President Kagame’s support for rebels operating in neighboring Democratic Republic of the Congo.
It’s probably no coincidence that all of these examples involve small African countries. These cases are also distinguished by a degree of arbitrariness, particularly since there are no clearly defined principles in the IFIs’ charters to guide these actions. As egregious as the Uganda case is from a human rights perspective, the rights of homosexuals are unfortunately no less targeted elsewhere in Africa and globally.
Of course, Russia is not a small country, and for that reason alone, it is highly unlikely that an IFI head would seek to punish Russian aggression unilaterally.
But there is a way forward in taking a harder line with Russia, and one that also guards against arbitrariness. The United States and EU member countries can announce that they will no longer support IFI projects in Russia in light of Russia’s actions in Crimea. In doing so, they can also call on other IFI shareholders to join them.
Some will argue that this action would open the door to the politicization of the IFIs’ development agendas, such that any member country with a grievance against another member could seek to block assistance. But IFI shareholders have hardly been pure on this matter to date. And the very prospect that the United States and Europe might act together in such a way demonstrates the extraordinary circumstances involved in Russia’s annexation of Crimea.
So how is this not arbitrary or simply a direct extension of US foreign policy? Ultimately, these institutions act on behalf of the collective will of their shareholders, the so-called “international community.” If the weight of opinion within that community sees the need for an IFI response to a violation of international norms and principles, then these shareholders can exercise their voice and vote within the IFIs to act. Yes, the United States might lead the charge, but the US ability to convince other shareholders to go along would give the action the legitimacy it deserves.
Would any of this have an impact? From an economic perspective, no. The current level of IFI financing barely registers in the Russian economy. But given Russia’s ability to block any firm UN response, the ability of the rest of the international community to act decisively through the IFIs sends a powerful message. All the more so given Russia’s clear interest in playing a leading role in these very institutions, particularly on the heels of Russia’s G20 presidency.
As with the Obama administration’s measured approach to sanctions toward Russia, a decision to punish Russia through the IFIs should be taken with care. In part, it depends on Russia’s stance toward IMF assistance in Ukraine going forward. If they play a reasonably constructive role within the fund, that might argue in favor of maintaining the current stance toward Russia’s borrowings in the other IFIs. But if Russia’s actions cause President Obama and European leaders to further escalate their responses in the form of tougher sanctions or other measures, then using the IFI stick might well be unavoidable.
The G20 took the extraordinary step last week of joining a meeting of the Paris Club, the informal forum where 19 member countries coordinate on debt reschedulings and write downs for countries that are in debt distress. The monthly meetings of the club (always in Paris) have long been known to be tight lipped, closed door, and well, clubby.
And while there is some overlap between the two groups, important G20 creditor countries like China, Brazil, and Korea are not members of the club.
The Paris Club since its founding has been associated with the OECD-type rich countries, a composition that is growing increasingly problematic. Just as concerns about the G7’s shrinking reach led to the new emphasis on the G20 beginning in 2009, debt policy experts have been concerned for some time now that the group has become a bit too exclusive.
The club’s effectiveness in addressing debt problems depends on a critical mass of countries participating in whatever workout is agreed to between the club and the debtor country. From this standpoint, it is problematic to have creditor countries with more than de minimus claims, most critically China, outside the club.
To be fair, the Paris Club members themselves are not seeking to maintain exclusivity. They would welcome the participation of other creditor countries that are willing to negotiate according to club principles. And in fact club practices have long encouraged ad hoc participation of associate members (including Brazil and Korea) and observers.
But it remains a challenge for the group of 19 countries to grow their numbers. As the club’s French chairman Ramon Fernandez noted in the Financial Times (firewall), “The door is open but it is still probably viewed in some places as a rich countries’ club. Joining a group that has this kind of image is a political decision.”
So last week’s joint G20-Paris Club meeting was an important overture to non-club members, particularly given Russia’s presidency of the G20. The Russians, with membership in both groups and alliances with the emerging market contingency of the G20, could prove uniquely effective in expanding the Paris Club’s roster of members.
Fortunately at the moment, there appears to be little risk that the club will be dealing with the kind of widespread debt problems in low income countries (LICs) that came to define the group of heavily indebted poor countries (HIPCs) over a decade ago. In fact, a recent IMF review of country-by-country debt sustainability analyses indicates that the risk of external debt distress has improved or remained stable in 90 percent of LICs since 2009. The obvious good news is that the massive HIPC debt relief gains have been sustained in the context of strong LIC economic performance.
That said, strong LIC performance is in the context of an unusual and uncertain external environment. Rwanda’s ability to sell debt to private bondholders at such attractive rates may speak well of the country’s economic performance, but it also speaks volumes about adjustments in risk appetite in this sustained low interest rate environment.
Importantly, monitoring potential problem cases (not necessarily Rwanda!) during uncertain economic times is another key part of what the Paris Club does each month. Yes, the group negotiates debt reschedulings when the need arises, but it also seeks to avoid the need by keeping a check on potential problem cases in a monthly Tour D’Horizon.
These days, the problems seem to be heavily biased toward emerging and advanced economies, which are no doubt featuring prominently on the Tour.
All the better that the Paris Club would seek to navigate this challenging landscape with a group of members that encompasses wealthy and emerging countries in the years ahead, and kudos to the club and the G20 for making the initial effort.
Now, why not make it a G20 deliverable to get all of the G20 membership to join the Paris Club? China, Brazil, Korea, are you listening? Did I mention the meetings are in Paris…every month?
After two and a half great years as director of CGD’s Rethinking US Development Policy initiative, I’m handing over the reins to my colleague Scott Morris. Many of you will know Scott as a CGD Senior Fellow with deep experience from the Treasury and on Capitol Hill. He’s a thought leader on many US development issues, especially the multilateral development banks and international debt. Rethink could not be in better hands as we start thinking about a new administration and Congress.
It has been an amazing honor to lead the initiative. Even more importantly, it has been an immense pleasure to work with all of you who care so deeply about improving US development policies and programs.
Collectively, we have achieved a lot of progress despite broader political gridlock in Washington. Just this week, the US Congress passed the Electrify Africa Act. This culminated a nearly three-year process, both on Capitol Hill and within the Obama Administration. This is an important win for all us, even if there is still much work to be done. Last year, Congress not only approved a long-term reauthorization of the Africa Growth and Opportunity Act, but also took some steps to make it more effective and accountable. The AGOA process also created new space for additional trade-related reforms, such as the proposed Global Gateways Trade Capacity Act.
Throughout all of this, the Rethink initiative and broader CGD team has continued to produce top-quality, independent analysis. Here are a couple of my favorite examples. Of course, the full list is much, much longer. Last year, we launched the 2016 White House and the World, which lays out over a dozen practical policy proposals for promoting growth and reducing poverty abroad. This product has received a lot of attention, and hopefully will continue to influence how policymakers think and act. In early 2015, we unveiled Rethink’s MCC@10 series, which examines this innovative agency’s first decade and charts the path ahead. And, there’s OPIC of course, America’s often misunderstood and underappreciated development finance institution. We have produced a ton of OPIC analysis over the years (see here, here, and here for examples), including a big and bold new idea for modernizing US development finance tools.
For my part, I will remain at CGD as a senior fellow focusing on development finance issues and how mobile technologies can deepen and improve citizen feedback loops. The Rethink initiative change also will provide more time to focus on a venture outside CGD. I will be leading an exciting new private data analytics venture called Copernicus, which applies geospatial frameworks to redefine how data is analyzed and used for decisions on the African continent, particularly at the sub-national level. So, this is far from a farewell. In the meantime, please join me in welcoming Scott to his exciting new role.
My earlier post on congressional funding for multilateral institutions betrayed little optimism about the Senate’s willingness to restore devastating funding cuts imposed by the House of Representatives. I had no idea.
The newly released Senate funding levels are just barely an improvement over the House’s draconian cuts, slashing the president’s multilateral budget in half. When cuts of 50 percent mark an improvement, you know you’re in trouble.
All told, the congressional response to the president’s budget request is a disaster for US leadership at the World Bank and the regional development banks. And the timing couldn’t be worse. Just when so much of the rest of the world is following China’s lead in showing how easy it can be to ambitiously fund the multilaterals, the United States is making it look like an impossible task.
There is one glimmer of hope, and it rests on the power of gridlock. Should Congress fail to deliver spending bills for the president’s signature this year, the ultimate outcome will be a continuing resolution (CR), which will simply carry forward the previous year’s funding levels. Since last year’s budget actually delivered on most of the president’s request, a CR would be a reasonably good outcome. Or at least one that is marked by treading water rather than drowning.
Is the US taking a more restrictive stance toward coal projects in the multilateral development banks (MDBs)? Certainly, this press release from the US Treasury and subsequent press coverage would suggest a major policy shift. Technically, the Treasury’s announcement does point pretty clearly to more restrictiveness. But practically speaking? Well, not so much, particularly when it comes to the poorest countries.
As Billy Pizer and I noted in July in our CGD essay on MDB financing for coal (ok, admittedly you have to look hard for it in a footnote on page 13), President Obama’s new climate strategy included a position on MDB financing for coal that was largely a reflection of the existing US position, with one additional restrictive element when it comes to middle income countries -- a requirement for the use of carbon capture and storage (CCS).
This week’s announcement simply clarifies that CCS will be incorporated into the Treasury guidelines, in addition to the existing requirements for middle income countries, including that projects in these countries must include offsetting actions. So, by adding CCS to the existing hurdles, the US position is technically more restrictive for the middle income countries.
But practically speaking, the US had already staked out a highly restrictive position when it comes to these countries. And with added pressure from European countries, coal projects in these countries have all but disappeared from the MDB pipelines.
Importantly, the US position toward coal financing in low income countries, reiterated in the Treasury announcement, remains significantly less restrictive. Which likely answers the question of whether US support for Kosovo’s coal project at the World Bank is waivering. Kosovo is a low income country and falls in the less restrictive category. The US has long been careful in stating its support for development of the Kosovo project at the bank (versus definitive support for ultimate project itself), and nothing in this week’s announcement suggests that support has shifted.
One interesting possibility following President Obama’s new strategy, the US Treasury’s clarification, and the World Bank’s own new energy strategy: more coal projects at the MDBs, particularly at the World Bank. World Bank management and the bank’s borrowers have a much clearer sense of the rules of the road today than they did a year or two ago when the bank had effectively halted coal finance with no stated policy for doing so. With an articulated approach from the bank and its largest shareholder (the US), it’s conceivable that countries like China may express renewed interested in engaging with the bank under the new conditions.
As Pizer and I said in July, the Obama Administration has struck a good balance. They have not declared the end of coal overseas. Rather they’ve set a high bar for MDB financing in low income countries (essentially preserving the option when there’s a clear development need) and a higher bar for credit worthy middle income countries, who have other financing options if they aren’t willing to accept the conditions that come with MDB financing.
In the world of sovereign debt workouts, the relationship between Argentina and the Paris Club has tended to look like Lucy, Charlie Brown, and the football. Time and again, Argentina (Lucy) would earnestly declare interest in striking a deal to repay its debt to club creditors only to pull back at the last minute. So imagine everyone’s surprise at this week’s announcement that Charlie Brown finally got to kick the football.
The deal clearly reflects Argentina’s growing desire to normalize its access to global markets in the face of domestic economic problems. Argentina’s government is also looking for a more sympathetic stance from the international community pending a decision in its case (Argentina v. NML Capital) before the US Supreme Court. A decision by the court to uphold the lower court ruling could effectively force Argentina to pay in full the claims of holdout private creditors, and in the process, disrupt long standing norms that have governed orderly debt workouts.
If you really want to understand this case in all of its glory, you should follow Anna Gelpern’s excellent posts on the Credit Slips blog, going back a year or so. In very crude fashion, the NML Capital argument is that the sovereign debt on which Argentina defaulted represents a contract, and a contract is a contract. Of course, if the international system had a bankruptcy mechanism akin to our domestic system, this view would not have currency. In the absence of a supra-sovereign mechanism, we have a set of norms and practices that seek to mimic the orderly proceedings of a bankruptcy process internationally, including the expectation that creditors will agree to reductions on the value of their bonds as the basis for a “workout” even if they have the right through national courts to seek to enforce the full value of the claim.
It will be interesting to see how the US government reacts following the Paris Club agreement. Three years ago, the US Treasury articulated a number of concerns about Argentina as the basis for opposing nearly all World Bank and Inter-American Development Bank assistance to the country. The list included lack of a Paris Club deal, a failure to settle investment disputes that had been brought to the international dispute settlement body (ICSID), and a dispute with the IMF over data reporting. The ICSID cases involving US firms have since been resolved and Argentina now appears to be making progress with the IMF.
That leaves the thorny question of the holdout private creditors. Treasury’s few public comments on its voting stance toward Argentina do not directly reference the holdouts, referring generally to “creditors,” which could be interpreted broadly to include the holdouts or more narrowly to mean the US government itself along with the other Paris Club creditors. And in fact, the US has filed amicus briefs in the lower court case in support of the existing regime around debt workouts, a position that favors Argentina over the holdout creditors. Of course, the US is at pains to note that its position is motivated by strongly held general principles around sovereign debt crises and workouts, not a desire to favor Argentina.
So it would seem that the United States might be poised to soften its MDB position toward Argentina, with a Paris Club deal, positive ICSID outcomes, the IMF issue moving in the right direction, and a reasonably clear and skeptical policy view toward holdout creditors.
Looking forward, far more worrisome is the general attitude in Congress when it comes to the issues at stake in Argentina v. NML Capital. The interests behind the lawsuit have pursued a lobbying strategy in tandem with their legal strategy, proudly in evidence in this “congressional letters” section of the website of American Task Force Argentina (ATFA), the advocacy group that espouses the views of the holdout creditors.
Of course, they have a right to express their views on debt policy, no matter how self-interested they may be. My concern is that they are by far the loudest, and largely the only, voice being heard in Congress right now when it comes to the highly technical and consequential issues surrounding sovereign debt crises.
Oftentimes on policy issues involving big money, you can count on one monied interest to provide a counterweight to the views of another monied interest. Barney Frank used to describe the issues before the House Banking Committee as “rich people fighting with each other.” And while there have been some elements of that dynamic in the court case, ATFA seems to be the only lobbying game in town these days. That can’t be bode well for future legislative efforts on an issue as complex as this one.
As we approach the G-20 Leaders Summit in Brisbane, it is worth giving credit to Australia for its robust presidency, and particularly the attention paid to the G-20’s development agenda. Sandwiched between the Russian and Turkish presidencies—countries considerably more controversial these days in the West—Australia faced the difficult task of generating sufficient goodwill among the membership within a year to make some progress on a sprawling work plan.
This is no easy task for any G-20 presidency. The development working group (DWG) is situated among nine other priority areas (from anticorruption to trade), each with its own working group, task force, or work stream by some other label. And all of this is carried out without a permanent secretariat.
So what are the achievements of and prospects for the G-20’s development agenda?
I’ll start with the good news. Four years in, the idea that the G-20 should have a development agenda is firmly entrenched. And the agenda itself is noticeably different from the historical G-7 agenda, which was almost always marked by an aid pledging exercise. Having agreed at the outset to steer clear of major aid commitments, the G-20 has sought to embody the idea that development policy should not be equated with foreign aid alone. Instead, on issues like agricultural productivity, financial inclusion, and infrastructure, the G-20 has sought to be a knowledge platform as well as a sort of policy steering committee for bilateral and multilateral actors, consistent with the G-20’s other work.
But the DWG’s infrastructure work in particular is beginning to show cracks. Since the working group’s inception four years ago in Seoul, infrastructure has been at the top of its agenda. That prioritization alone speaks well of the group’s responsiveness to the developing world’s own priorities, where infrastructure has long been recognized, both literally and figuratively, as a major bottleneck to growth and development.
Yet, what are we to make of the G-20’s more recent, but separate, “investment and infrastructure” agenda? No clear conceptual lines have been drawn between the two, but they proceed within distinct working groups of different actors, one from the sherpas’ channel (DWG) and one from the finance ministers’ channel (“investment and infrastructure”).
If G-20 finance ministers, from a mix of developed and developing economies, see value in a shared infrastructure agenda for their own countries, what’s the value of a separate agenda for other developing countries? Arguably, the DWG has a more distinct focus on low-income countries. And, granted, Brazil’s infrastructure needs and challenges may look more like those of the United States than they do of Malawi. Still, are these separate work streams for infrastructure achieving a larger development aim, or are they reinforcing the foreign-aid view of development as something that is done to other countries?
I’m even more discouraged by what promises to be one of the major infrastructure deliverables for the leaders’ summit: a World Bank–hosted Global Infrastructure Facility (GIF). Frankly, having read the World Bank’s note to the G-20, I still don’t know what to make of the new facility, except that the ratio of new bureaucracy created to new money mobilized seems extremely high.
Even more damning given the initiative’s emphasis on partnerships are the missing actors among the partners. The GIF highlights the role of “MDBs and RDBs,” and yet neither the Inter-American Development Bank (IDB) nor the African Development Bank (AfDB) is present among the partners. This absence of the IDB and AfDB has the appearance of infighting among the MDBs—certainly nothing new, but something the G-20 itself ought to be able to overcome in its role as “shadow” governance of the MDB system.
In the end, a key test for the GIF is the degree to which it will matter for G-20 countries’ own infrastructure agendas. Will the GIF offer something new and better than traditional MDB engagement in countries like India, Brazil, or China? Or will this end up as another showpiece initiative foisted onto low-income countries alone? Apparently, the IDB and AfDB had their doubts. I have some too.
The House Financial Services Monetary Policy and Trade Subcommittee is holding a hearing this Friday, October 9 on “The Future of the Multilateral Development Banks.” It’s an impressive witness line-up, including CGD Senior Fellow Scott Morris, Dean Karlan, Martin Ravallion, and Patrick Chovanec.