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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.
The world’s development challenges are far too vast for the old way of doing things. To generate the trillions of dollars necessary to achieve the Sustainable Development Goals, international institutions, policymakers and the private sector need a new approach that unlocks the power of private investment. IFC Executive Vice President and CEO Philippe Le Houérou will address how his institution’s new strategy of “creating markets,” especially where they are weak or nonexistent, can help redefine development finance in an uncertain global economic environment. Following Le Houérou’s remarks, he will be joined by a stellar panel for a discussion of the private sector development agenda.
Private sector development has long been viewed as essential for economic growth in developing countries, and the US role in promoting it has focused mostly on how developing country governments could best set a policy environment that made it possible. But let’s consider the risks of concentrating too heavily on the private sector. What could go wrong with an agenda that is centered on “deal making for development”?
Hear policymakers from inside and outside the US government discuss their experience applying the principle of country ownership, reflecting on its importance as well as its challenges and trade-offs. Forthcoming research from CGD’s US Development Policy Initiative will review progress made in implementing country ownership, identify the constraints the agencies face, and offer recommendations for better execution of a country ownership approach in practice.
Please join us to hear policymakers from inside and outside the US government discuss their experience applying the principle of country ownership, reflecting on its importance as well as its challenges and trade-offs. Forthcoming research from CGD’s US Development Policy Initiative will review progress made in implementing country ownership, identify the constraints the agencies face, and offer recommendations for better execution of a country ownership approach in practice.
In 2016 on the CGD Podcast, we have discussed some of development's biggest questions: How do we pay for development? How do we measure the sustainable development goals (SDGs)? What should we do about refugees and migrants? And is there life yet in the notion of globalism?
And we have heard from some major international figures, including two former presidents—Ernesto Zedillo of Mexico and Joyce Banda of Malawi—Jim Kim, Christine Lagarde, Lawrence Summers, and Ngozi Okonjo-Iweala, as well as several major development organization heads, private sector representatives, government officials from around the world, and leading academics and thinkers—including, of course, many of CGD’s own experts.
In early 2017, the CGD podcast will discuss how best to conduct impact evaluations with Rachel Glenerster of J-PAL and our own Bill Savedoff; we will think about how digital technology impacts development with Raj Kumar of Devex; and we will ask if development finance institutions like the US’ OPIC and the UK’s CDC are the best way to pay for development, with their respective heads Elizabeth Littlefield and Diana Noble. Look out also for podcasts about major CGD work, including new ideas to better help refugees in long-running emergencies; the problems of trying to measure corruption; how biometric identification can help achieve several of the SDGs; and how Britain’s trade policy can make the most of Brexit.
I do hope you will stay tuned in 2017—and please share the podcasts and encourage your friends and colleagues to subscribe here or on iTunes. As ever, I welcome your thoughts and feedback. Thanks to Stephanie Brown, who produces all our podcasts—and to you for listening.
Dig deeper, though, and something different, but no less remarkable, is going on. The fact is this replenishment was not primarily about donor pledges. Instead, it marked a fundamental turning point for the World Bank, with an agreement among the donors to allow the bank for the first time to leverage IDA's resources through borrowing in the marketplace.
More on this in a minute, but first it's also important to recognize the major policy decisions taken as part of this replenishment. It is satisfying and encouraging to see a range of commitments that align with key recommendations from CGD's High Level Panel on Multilateral Development Banking. These include the financial reforms themselves, greater effort toward crisis preparedness, more focus on fragile settings, a new collaboration with IFC to better target private sector development at the bank, and new commitments to pursue global public goods like climate financing. All of these commitments, if implemented effectively (something that bears watching), should move the World Bank closer to the institution it needs to be in the face of today's development challenges as laid about by our panel earlier this fall.
But let's consider more closely the impact of those financial reforms. Assuming that traditional IDA donor contributions stayed the same in this replenishment (the World Bank will not release details about donor pledges until early next year, but it's a safe bet that donor contributions as a whole did not increase from the $35 billion in commitments in 2013), those contributions as a share of total IDA resources have now fallen significantly, from two-thirds of total resources three years ago to less than half today. Consider the United States in particular. In the last IDA replenishment, the Americans pledged $3.9 billion, which accounted for about 7.5 percent of total IDA resources. The same pledge today accounts for just 5 percent of the total replenishment.
As a one-time change, this is striking, and as a directional shift, the longer term implications are huge. To put it bluntly, by opening the door to a major source of non-donor financing in the years ahead, these financial reforms will mean that the World Bank can now literally afford to say no to the United States and other major donors like the United Kingdom and Japan on a range of policy matters.
The implications of this are far-reaching. Will it remain a given that the US nominee will continue to capture the World Bank presidency? Will the bank continue to avoid working in countries like Iran and Zimbabwe at the behest of the United States alone? Will the World Bank bend to the will of a new political regime in Washington and reverse course on its coal financing restrictions? Historically, the United States (and often the US Congress) has exerted its will on issues like these by using the threat of withholding its IDA contributions in any given year. As this contribution becomes vanishingly small relative to total resources, that threat starts to look pretty weak.
Going forward, it is likely that the United States will need the World Bank more than the bank needs the United States. As I’ve said elsewhere, the United States relies on the bank as an extension of its strategic and foreign policy in a way that is unique among the institution’s shareholder countries. What China does bilaterally through entities like China Exim Bank and China Development Bank, the United States mostly seeks to do through the World Bank and the other MDBs in which it is a leading shareholder. Major World Bank commitments to support the Obama administration's Power Africa initiative are a positive example of this.
In practice, the US has often exerted its will with the power of the IDA contribution as a key, if not leading, point of leverage over the institution.
US policymakers will need to do some hard thinking about how best to prioritize the demands they place on the bank, and how to reach broader consensus in this multilateral institution as an alternative to seeking to impose its will unilaterally. It's not at all clear that the incoming Trump administration, with its "America First" sloganeering, is up for this kind of hard thinking. But hope springs eternal. And in any event, this IDA replenishment sets the World Bank on a path that will help to ensure a future of sustainable financing in support of the institution's vital mission.
To say that John Bolton, President-elect Trump’s expected pick for #2 at the State Department, is a well-known UN critic would be an understatement. But it’s well worth noting that he has opinions about the IMF and the multilateral development banks too.
In a post-election opinion piece, Bolton affirmatively invokes an earlier call to shut down the IMF, made nearly twenty years ago by former US officials who had in turn been out of office for at least ten years. There’s not much value in debating the merits of the IMF today based on the institution’s performance during the Asian financial crisis circa 1998, with that performance measured by people whose direct experience with the Fund was already ten to twenty years old.
But I do want to focus on his ideas about the MDBs. Bolton argues that the development banks should be privatized, except for “the one for Africa.” (For the record, it’s called the African Development Bank). His argument is two-fold: the world is awash in private capital today, rendering the MDBs irrelevant; and, US support for the MDBs is subsidizing lending to “our competitors.”
Both of these ideas are wrongheaded. To be fair, Bolton’s first point was a fundamental issue that CGD’s recent High Level Panel on the Future of Multilateral Development Banking sought to address this past year: with private capital flowing to developing countries like never before, what’s the point of the MDBs? But the panel’s conclusion was clear. We should not confuse public aims, which require public financing in some form, with the aims of private investment. This confusion also plagues President-elect Trump’s much-touted infrastructure plan, which relies overwhelmingly on tax breaks for private firms, an approach that will likely waste public resources and not achieve its stated aims in key areas of public infrastructure like roads and bridges.
When it comes to the MDBs, the range of endeavors we call global public goods—mitigating the effects of climate change, avoiding fast-moving pandemics that can leap from poor countries to rich ones in a matter of months, working across countries to manage the flow of refugees fleeing violence in their home countries—all of these call for a response at the international level, and none can be adequately addressed by relying exclusively on private capital.
Fortunately, the MDBs have already proven themselves to be effective in these and other parts of the global development agenda. They certainly could be more effective, which is why CGD’s panel has offered a range of recommendations for reform. But removing them from the equation entirely would be devastating.
As for Bolton’s argument that the United States is subsidizing the competition by supporting the MDBs, most of the MDBs’ heavily subsidized lending and grants today go to Sub-Saharan Africa, the region that Bolton seems to be ok with supporting through the development banks.
That’s not to say that US backing, and that of other major shareholders (including China), does not act as a subsidy on the banks’ other activities. Yet, setting aside support for the very poorest countries, direct US capital contributions to the World Bank over the entire 73-year history of the institution have totaled $2.8 billion. That’s less than 10% of what the United States spends annually on foreign assistance.
Is this modest support “subsidizing” our competitors? In part, that depends on whether you see a zero-sum global economy, or one in which growth in poorer countries means new export markets for US goods and services, as well as more stable societies that are less prone to the global public “bads” that afflict the world today.
Bolton would do well to listen more closely to our military leadership, which has gone out of its way to praise the role of the MDBs in supporting the goal of avoiding military conflict. For example, as Commander of US Southern Command, Admiral James Stavridis wrote of the Inter-American Development Bank’s “tremendously positive influence” on Latin America based on what he saw on the ground in his region of operation.
If President-elect Trump has his way, Bolton will sit in a powerful position at the State Department with considerable influence over the multilateral agenda. Fortunately, he will not have the final say on US policy when it comes to the MDBs and the IMF, a prerogative that goes to the Treasury secretary. Of course, whether Bolton’s views are safely contained within Foggy Bottom or they ultimately affect policy at 1500 Pennsylvania Avenue will depend on a Treasury leadership team that remains engaged on these issues and a White House that continues to respect Treasury’s role. It may also depend on whether those military voices, including the multiple retired generals tagged for the Cabinet, will continue to speak up in favor of multilateral institutions. Here’s hoping all of that comes to pass.
As the Obama Administration heads into its final months, USAID Administrator Gayle Smith offers a look at how President Obama and his team chose to address the question of US leadership in global development. She shares her perspective on how USAID and its community of partners are positioned to make progress in an increasingly sharp-edged world.
Researchers urge China to improve their debt practices and adopt standards
Center for Global Development
Washington – China’s Belt and Road Initiative – which plans to invest as much as $8 trillion in infrastructure projects across Europe, Africa, and Asia – raises serious concerns about sovereign debt sustainability in eight countries it funds, according to a new study from the Center for Global Development.
The study evaluated the current and future debt levels of the 68 countries hosting BRI-funded projects. It found that of the 23 countries that are at risk of debt distress today, in eight of those countries, future BRI-related financing will significantly add to the risk of debt distress. You can see the full list of countries, their external debt levels, and China’s portion of that debt in the new study here.
“Belt and Road provides something that countries desperately want – financing for infrastructure,” said John Hurley, a visiting fellow at the Center for Global Development and a coauthor of the study. “But when it comes to this type of lending, there can be too much of a good thing.”
According to the study, China’s track record managing debt distress has been problematic, and unlike the world’s other leading government creditors, China has not signed on to a binding set of rules of the road when it comes to avoiding unsustainable lending and addressing debt problems when they arise.
“Our research makes clear that China needs to adopt standards and improve its debt practices – and soon,” said Scott Morris, a senior fellow at the Center for Global Development and a coauthor of the paper.
The study recommends that China:
Multilateralize the Belt and Road Initiative: Currently, the multilateral development institutions like the World Bank are lending their reputations to the broader initiative while only seeking to obtain operational standards that will apply to a very narrow slice of BRI projects: those financed by the MDBs themselves. Before going further, the MDBs should work toward a more detailed agreement with the Chinese government when it comes to the lending standards that will apply to any BRI project, no matter the lender.
Consider additional mechanisms to agree to lending standards: Some methods might include a post-Paris Club approach to collective creditor action, implementing a China-led G-20 sustainable financing agenda, and using China’s aid dollars to mitigate risks of default.
In all eight highest risk countries, the proportion of external debt that is owed to China and its banks will rise, sometimes dramatically, under the Belt and Road Initiative:
Pakistan: Pakistan, by far the largest country at high risk, currently projects an estimated $62 billion in additional debt, with China reportedly financing roughly 80 percent of that. Big-ticket BRI projects and the relatively high interest rates being charged by China add to Pakistan’s risk of debt distress.
Djibouti: The most recent IMF assessment stresses the extremely risky nature of Djibouti’s borrowing program, noting that in just two years, public external debt has increased from 50 to 85 percent of GDP, the highest of any low-income country. Much of the debt consists of government-guaranteed public enterprise debt and is owed to China Exim Bank.
Maldives: China is heavily involved in the Maldives’ three most prominent investment projects: an upgrade of the international airport costing around US$830 million, the development of a new population center and bridge near the airport costing around US$400 million, and the relocation of the major port (no cost estimate). The country is considered by the World Bank and the IMF to be at a high risk of debt distress and is currently being buffeted by domestic political turmoil.
Lao, P.D.R. (Laos): Laos, one of the poorest countries in Southeast Asia, has several BRI-linked projects. The largest, a $6.7 billion China-Laos railway, represents almost half the country’s GDP, which led the IMF to warn that the project might threaten the country’s ability to service its debts.
Mongolia: Mongolia’s future economic prosperity depends on major infrastructure investments. Recognizing Mongolia’s difficult situation, China Exim Bank agreed in early 2017 to provide financing under its US$1 billion line of credit at concessional rates for a hydropower project and a highway project. If reports of an additional $30 billion in credit for BRI-related projects over the next five to ten years are true, then the prospect of a Mongolia default is extremely high, regardless of the concessional nature of the financing.
Montenegro: The World Bank estimates that public debt as a share of GDP will climb to a whopping 83 percent in 2018. The source of the problem is one very large infrastructure project, a motorway linking the port of Bar with Serbia that would integrate the Montenegrin transport network with other Baltic countries. The Montenegro authorities concluded an agreement with China Exim Bank in 2014 to finance 85 percent of the estimated US$1 billion cost for the first phase of the project, with the second and third phases likely to lead to default if financing is not provided on highly concessional terms.
Tajikistan: One of the poorest countries in Asia, Tajikistan is already assessed by the IMF and World Bank to be at “high risk” of debt distress. Despite this, it is planning to increase its external debt to pay for infrastructure investments in the power and transportation sectors. Debt to China, Tajikistan’s single largest creditor, accounts for almost 80 percent of the total increase in Tajikistan’s external debt over the 2007-2016 period.
Kyrgyzstan: Kyrgyzstan is a relatively poor country with significant new BRI-related infrastructure projects, much of it financed by external debt. China Exim Bank is the largest single creditor, with reported loans by the end of 2016 totaling US$1.5 billion, or roughly 40 percent of the country's total external debt. While currently considered to be at a “moderate” risk of debt distress, Kyrgyzstan remains vulnerable.
The full study, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective” can be found at: https://www.cgdev.org/publication/examining-debt-implications-belt-and-road-initiative-policy-perspective.
The backlash to the discordant US position on the Asian Infrastructure Investment Bank (AIIB) this week was swift and seemingly universal. So much so that I can’t find any voices defending the US view to link to here. Fair enough. As I’ve already argued (here and here), the criticism is deserved.
But I part ways with one emerging narrative about how the US can get back on track. I don’t agree that the US should join the very institution that it has so strongly called on others to avoid. Even if the will were there from the Obama administration (and it is decidedly not), the path to membership would be nearly impossible. President Obama couldn’t sign the United States up for AIIB membership for the same reason he can’t offer US approval for the IMF reform package (something he does want). Namely, the US Congress. Capitol Hill would need to authorize and pay for US participation in the new institution. That will not happen. Earlier this week Treasury Secretary Jack Lew reiterated the Administration’s urging for IMF reform in Congressional testimony (play video from 19.17 – 23.38).
Yet a better and more feasible option is already at hand.
There’s a higher likelihood that the Obama administration could work with Congress on a set of measures to increase the attractiveness of the World Bank and Asian Development Bank in the eyes of the very countries that are now looking fondly toward the AIIB.
The US objective at this point will be to ensure that the AIIB does not grow quickly to eclipse the existing international financial institutions (IFIs), or that the AIIB does not otherwise become the launching point for an alternative network of regional development banks, all of them excluding the United States. The best way to do that is to realize more of the pent up ambition for the new institutions through the existing ones. That means one thing: money.
The United States, and particularly the US Congress, can’t expect to “lead” in institutions like the World Bank if it isn’t willing to pony up more resources. This means demonstrating a newfound ambition when it comes to more capital for the World Bank and the regional development banks in Asia, Africa, and Latin America. Much of the US talk in these banks in recent years is around doing more with less, leveraging more, and relying more on private money. In the meantime, many of the World Bank’s leading shareholders (China, the UK, France, Germany) are now demonstrating that they are perfectly willing to put more of their public resources through multilateral channels.
The United States can demonstrate renewed leadership by channeling some of this ambition from other countries into the existing IFIs. Why not announce support for a doubling of World Bank capital? That may sound prohibitively expensive, but the budgetary implications are actually very modest, representing about one percent of the annual US foreign assistance budget.
Is that too costly an investment to shore up US strategic influence globally at a time when it appears to be in peril?
The Chinese government has published the Asian Infrastructure Investment Bank’s (AIIB) newly adopted articles of agreement. That’s an encouraging early sign of transparency, and more importantly, of timely transparency. Much of what is in the articles was foreshadowed by previous comments and reporting, but there are surprises, such as stronger-than-expected veto powers for the Chinese and the possibility for non-sovereign membership.
Here are my first reactions:
This is very much a development institution in purpose. The Chinese early on sought to distance the AIIB from the other MDBs, both by leaving the “D” out of the name and by emphasizing that the new bank would simply be investing in infrastructure. Yet, the articles establish as a first priority that the AIIB’s purpose is to “promote investment … for development purposes.”
In operations, the AIIB is keeping its options open, with the possibility for financing and activities that extend well beyond traditional infrastructure lending. The articles allow for a range of financing instruments and clients, including identifying new instruments and activities at a later date. The articles also open the door widely to “special funds,” or trust-fund arrangements that are separate from the bank’s balance sheet. These funds do not appear to be restricted to bank members. So perhaps a USAID-funded infrastructure project preparation fund is in the AIIB’s future?
The Chinese will retain more control over presidential selection than do the Americans at the World Bank or the Japanese at the ADB. Specifically, the articles provide veto power for China over selection of the president, formalizing the largest shareholder’s power to decide in an area that has relied on informal arrangements at the other institutions.
More generally, the Chinese veto is more prevalent than might have been expected based on earlier characterizations of the Chinese position. Fair enough, no veto exists for project-level decisions, but the number of other decisions subject to supermajority requirements (i.e., vulnerable to a Chinese veto) appears to go beyond those in the other MDBs.
The articles allow for non-sovereign membership, which is an interesting departure from the traditional MDB model. Could we see a China Investment Corporation membership, or maybe Rio Tinto? The articles would not permit non-sovereign members from countries that are not themselves AIIB members. So, sorry Gates Foundation, this MDB isn’t for you.
The articles adopt (as widely anticipated) a non-resident board of directors, a laudable innovation in my view. Nonetheless, the functions of the board remain largely unspecified, signaling that hard decisions still lay ahead. And when it comes to critical operational questions about the balance of power between the board and senior management, the Chinese were careful to specify a super majority decision making threshold. So the largest shareholder knows key decisions still remain in this area, and they aren’t willing to throw those decisions open to a simple majority vote.
Finally, the composition of the 12-member non-resident board is striking. The articles allocate nine board seats for regional members and three seats for non-regional members, and establish higher minimum voting thresholds for the non-regional seats. These thresholds determine which countries get their own board seats and which countries will need to join multicountry constituencies. Based on the thresholds established in the AIIB articles, it appears that China, India, and Russia among the regional members, and Germany among the non-regionals will be eligible for board seats, while all other countries will be required to join multicountry constituencies. Specifically, 34 regional countries will have to organize themselves into 6 board seat constituencies, while 19 non-regional countries will have to organize themselves into 2 board seat constituencies. Perhaps more than any other governance standard, the rules and procedures around the non-resident board clearly establish the AIIB as a regionally dominated institution — both in the relative balance of board seats (6 to 3) and in the number of countries within each constituency (just under six countries per regional board seat and just over nine countries per non-regional seat).
Overall, the AIIB’s newly minted articles of agreement reflect an impressive degree of expertise and creativity. They are drafted with clear reliance on existing MDB articles and equally clear independence from those articles. The Chinese decided in establishing a multilateral institution that they would do so from a dominant position, and that position is certainly reflected in the AIIB’s articles. But the overall picture is more complicated than that. Beyond enshrining a favored position for the leading shareholder, the articles also establish clear priorities that favor the region as a whole in governance, seek to establish a governance model that is efficient as well as effective, and retain a high degree of flexibility in all aspects of bank operations so that the institution can evolve over time.
Best of all, the AIIB articles have been established as a public document. Let’s hope that principle carries forward in all aspects of the bank’s operations.
The World Bank should be ambitious in working toward clean energy approaches in its development strategies, but it would be a mistake to definitively rule out coal in all circumstances. Such a decision would be bad for development and would also undermine the very goals that the bank’s coal critics espouse by further pitting developing and developed countries against each other in the climate debate occurring within the bank. The key challenges are to identify the relevant development needs related to coal-fired generation, to define the role of the bank, and to elaborate guidelines to direct decisions. In this essay, we discuss the broad issues and then summarize what the guidelines likely would mean in practice.
President Obama will visit Africa this week for the second time in five years, stopping in Senegal, South Africa, and Tanzania. Expectations that Obama would pay special attention the continent ran high upon his first election, and some development experts have been disappointed in what they regard as his administration’s relative neglect of a key economic region.
To get a sense of what this trip means for Obama’s African legacy and the expectations of his hosts, I invited CGD vice president Todd Moss and visiting fellow Scott Morris to be my guests on this week’s Wonkcast. Todd and Scott served as deputy assistant secretaries in the George Walker Bush and Obama administrations, respectively, Todd in the State Department (where he was oversaw US relations with west Africa) and Scott at Treasury (where he was responsible for the US role in multilateral institutions, including the African Development Bank). I’m eager to hear whether or not their views differ on how Obama can best build a stronger relationship with Africa.
So far, Todd notes, Obama’s record on Africa is overshadowed by that of his predecessor, who launched both the Millennium Challenge Corp. (MCC), a new aid program that largely focuses on Africa, and the President’s Emergency Plan for AIDS Relief (PEPFAR), a multibillion-dollar effort to respond to the pandemic ravaging much of the continent. By comparison, Todd says, signature Obama initiatives potentially important for Africa, such as Feed the Future and the US Global Health Initiative have barely gotten off the ground.
Scott argues in Obama’s defense that the 2007-08 global financial crisis that awaited Obama when he took office and subsequent slow economic growth and tight budgets have made it a tough time to launch initiatives that require new money.
“We’ve been in a period of very constrained public finance in this country and it makes it hard to think about rolling out new initiatives, which are sort of the hallmark of how any administration establishes its relationship with Africa,” he says.
Todd concedes this point, but adds that the United States should in any event be reframing its relationship with Africa and downplaying the role of aid.
“Africa is doing very well economically and starting to feel a lot more confident in the international arena. They don’t actually want a lot of big aid packages, they want what everyone else wants, which is trade and investment and to be treated like a normal business partner,” he says.
Both Todd and Scott point to US support for the African Development Bank as an important component of Washington’s relationship with the region.
“I have no doubt the African development bank will come up many times on this trip because it is that important of an institution on the continent,” Scott says. “The AfDB is unique in a couple of important and positive ways: it is of the continent, and it has credibility. It is also unique among the multilateral development banks as being very heavily infrastructure focused. What I would like to see from the president and from our government is a strong commitment to fund the institution…This year the bank is going through a replenishment exercise and the United States has an opportunity to further increase its commitment.”
We close with a discussion of one of Todd’s favorite topics when it comes to Africa: the potential for the US Overseas Private Investment Corporation, a unique government entity that annually turns a profit, to make an even greater contribution to the region’s development, especially in the power sector. In Tanzania, the third stop on Obama’s tour, some 85% of the population lacks access to a stable supply of reliable electricity.
“OPIC has been extremely innovative. They've been ramping up their investments in Sub-Saharan Africa with over $900 million last year in new commitments,” Todd says. “But OPIC has a lot of regulatory constraints on it that keeps it from performing at its full potential. We’ve tied one hand behind OPIC’s back.”
Todd also offers praise for a number of other US agencies that support development in Africa through mechanisms other than aid. Listen to the Wonkcast to find out which ones.
My thanks to Aaron King for editing the Wonkcast and providing a draft of this blog post.
A multi-year project just came to fruition with the endorsement by the Board of the World Bank of its new set of safeguards—the social and environmental standards that govern Bank-funded projects in client countries. World Bank president Jim Yong Kim has also issued a presidential directive which, though not adopted by the Board as a policy, commits bank projects to not discriminate against people described as disadvantaged.
There’s been a lot of debate about this re-writing of the Bank’s own rules. Major changes include new standards on protecting workers rights, indigenous peoples, and vulnerable populations. But rather than a government being forced to meet the Bank’s own standards, countries will in future use their own laws to test if they are doing enough to protect people. Critics say that amounts to the Bank rolling back protections, because it will be relying on governments that might not have standards as high as they should.
CGD's expert on multilateral development banks, senior fellow Scott Morris, reacted to the new policies in a recent blog post, and joins me this week on the CGD Podcast to discuss.
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.
It’s a time of fundamental uncertainty about the future direction of US development policy, so let’s talk fundamentals.
1. Foreign assistance is not charity. It is in our direct national interest.
US development policy, including foreign assistance, is an essential tool to promote US security and economic objectives. Yes, the less than one percent of the US federal budget spent on foreign assistance may appeal to our altruistic side, but fundamentally it is about promoting US interests in the world. Presidents and Congresses past have strongly supported good development policy and spending on foreign assistance because, ultimately, it’s the smart thing to do for Americans.
We are safer as a country because we invest in development. US leadership on the Ebola outbreak helped contain the pandemic when it threated to spread rapidly around the world. Right now, US assistance to other countries is helping to control the spread of the Zika virus. US foreign assistance supports efforts to disrupt terrorist financing and defend populations around the world that are vulnerable to groups hostile to the United States. US support for efforts by the IMF and multilateral development banks to prevent and contain financial crises around the world safeguard our markets at home.
And it’s not just about Americans’ security in the face of threats. The economic success of poorer countries benefits us at home. Yesterday’s aid recipients are among today’s largest markets for US goods and services. In the years following the Korean War, South Korea, then among the world’s poorest countries, was a major recipient of US assistance. Today, South Korea has itself become a major donor and is one of America’s largest export markets. US exports to developing countries total more than $600 billion annually and are greater than US exports to China, Europe, and Japan combined.
2. Development works.
There has been a sea change in US development programs over the past decade toward a relentless focus on results—results measured in lives saved and poverty reduced; not just dollars spent. US taxpayer-funded programs have contributed to a reduction in child mortality rates of nearly half around the world. Under initiatives launched by President George W. Bush, the United States helped prevent 30 million new HIV infections and nearly 8 million AIDS-related deaths, and with US leadership, we are within reach of fully eliminating diseases like polio and malaria that have plagued humankind for millennia. Under more recent initiatives launched by President Obama, support for small farmers in poor countries helped reduce overall poverty and child stunting by up to a third in target countries. Another initiative is bringing electricity for the first time to homes and businesses in Sub-Saharan Africa, which will enable hospitals to operate more effectively, children to study at night, and women to move safely through their communities. Congress passed legislation earlier this year to ensure both programs continue.
3. US leadership matters on global threats.
The United States alone cannot be everywhere and do everything. That’s why US policy has already shifted toward multilateral solutions in recent years, whether in response to the threat posed by climate change, fast-moving pandemics, or humanitarian crises emanating from armed conflicts around the world. If the United States does not continue to lead in multilateral settings like the UN, the World Bank, the IMF, and the G20, no one else will.
CGD has had things to say over the years in each of these areas about how US efforts could be improved, based on our researchers' reading of the evidence. That’s the Center's job.
At the same time, in our view much of what CGD has had to say is based on a core premise that too often goes unstated. Namely, that US development policy, with bipartisan support, has made steady progress over many years as one of the more effective things our government does. It is, day in and day out, advancing US interests around the world and at home.
While we at CGD's Rethinking US Development Policy Initiative are often promoting changes and reforms to existing programs and policies, and may sound quite critical of the status quo in the process, we nonetheless recognize the fundamental value of what exists today—and that this status quo has vastly improved in the last decade and can continue to do so.
As a self-proclaimed “outsider” administration takes office in two months, we will be revisiting these fundamentals. We will be eager to engage with this administration on any and all good ideas to improve US development policy.
But we also see the need to bring evidence to bear in support of existing agencies, mandates, and missions. That’s why you will be seeing a new series of briefs in the months ahead that address basic components of US policy when it comes to development and identifying the core value of these things as we see them, informed by evidence and experience.
You can still count on CGD for the cutting-edge of research in development. But new research always rests on a base of existing knowledge, and right now, that base needs more of a spotlight.