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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.
When US Treasury Under Secretary David Malpass appeared before Congress just five months ago, he indicated that the World Bank “currently has the resources it needs to fulfill its mission” and went on to characterize the bank and other multilateral institutions as inefficient, “often corrupt in their lending practices,” and ultimately only benefitting their own employees who “fly in on first-class airplane tickets to give advice to government officials.”
From that standpoint, it would be hard to imagine US support for a significant injection of new capital into the World Bank’s main lending arm, the IBRD, as well as the bank’s private sector lender, the IFC.
And yet, that’s exactly the surprising outcome just announced at the World Bank’s spring meeting of governors. Not only is the Trump administration supporting a $7.5 billion capital increase for the IBRD (and at that, one that is 50 percent larger than the capital increase supported by the Obama administration in 2010), it has also signed on to a policy framework for the new money that makes a good deal of sense.
Here are the highlights:
The capital increase package will better enable the institution to deliver on its commitment to be a leader on climate finance and more broadly in support of global public goods, aligning with key recommendations from CGD’s 2016 High Level Panel on the Future of Multilateral Development Banking. Under the agreement, the climate-related share of the IBRD’s portfolio will rise from the current 21 percent to 30 percent. The IFC’s share will rise even higher to 35 percent. New ambition on the climate agenda also includes commitments to screen all bank projects for climate risks and incorporate a carbon shadow price into the economic analysis of projects in emissions-producing sectors. For global public goods more generally, the agreement newly commits a (very modest) share of IBRD annual income to global public goods.
The package introduces the principle of price differentiation based on country income status, with higher income countries paying more than the bank’s other borrowers. This proposal, which was also put forward by CGD’s High Level Panel in 2016, will generate additional revenues for the bank and asks more of countries that have less financing need. While the introduction of the principle marks an important step forward, the actual price differentiation is extremely modest—at most, the spread between high income borrowers will be just 45 basis points on IBRD lending rates of about 4 percent.
The package assigns new guidelines for the IBRD’s overall lending portfolio to channel 70 percent of the bank’s resources to countries with per capita incomes below $6,895 and 30 percent to countries above this so-called “graduation threshold.” These targets would not be binding when it comes to crisis lending. In practice, these new guidelines seem to align with the existing pattern of IBRD lending, as indicated in the figure. In this sense, the idea that these guidelines amount to cutting China's access to World Bank loans appears exaggerated, though over time, as more countries join the higher income category, the 30 percent share will be allocated across more borrowers.
The package also attempts to identify a new financial framework that requires greater discipline when it comes to tradeoffs between lending volumes, loan pricing, and the bank’s administrative budget. This framework, which reportedly was a priority for the US government, may not ensure that this will be the last ever capital increase for the World Bank (as an unnamed US official promises), but it does appear to introduce a greater level of coherence around financial/budgetary decisions that have historically proceeded in a disjointed fashion within the institution.
Finally, even as the agreement seeks greater differentiation among countries, it reaffirms the World Bank’s commitments to stay engaged with all its client countries, including China. In fact, given US rhetoric, it’s surprising that the agreement does not stake out any new ground on the subject of country graduation. In fact, it seems to go out of its way to reassure all current bank borrowers that they are still welcome and that the decision to graduate from assistance is theirs to make. In the end, as much as ending China’s borrowing from the bank would have been a political prize for the Trump administration, US officials appear to have taken a sensible policy path that favors good incentives over polarizing fiats.
To say that John Bolton, President Trump’s latest pick for National Security advisor 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 invoked 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.
But I do want to focus on Bolton’s ideas about the World Bank and other multilateral development banks. 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.”
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 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 75-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.
US leadership at the IMF and World Bank has been essential to their strength over many decades, particularly when it comes to ensuring that they have adequate resources to do their jobs. That’s why the timing of Bolton’s pick could be particularly troubling at the World Bank, where negotiations for a capital infusion from the United States and other member countries are coming to a head. The US Treasury has already been taking a hard line with the institution, demonstrating considerable reluctance to put more money in. With Bolton at the White House, Treasury hard-liners now have a powerful ally next door.
In his appearance before the committee, Morris outlined findings from newly CGD published analysis exploring the debt implications of China’s Belt & Road Initiative—and offered his views on what it should mean for US global engagement.
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.
In 1944, the United States created a blueprint for economic statecraft, hashed out with other leading countries at Bretton Woods, New Hampshire, that relied heavily on a new class of multilateral institutions to pursue US interests in the world—the multilateral development banks (MDBs), represented initially by the World Bank, the International Monetary Fund, and an envisioned World Trade Organization.
The relative fortunes of these institutions and their agendas have varied over time, but the blueprint itself is now under serious duress in the “America First” strategy of international engagement of the Trump administration. Most visibly, the firm rejection of the Trans-Pacific Partnership and ongoing efforts to revisit the North America Free Trade Agreement have put trade multilateralism directly in the crosshairs of this administration.
Less visible has been a decline in interest in and support for the other elements of the Bretton Woods blueprint. To see it in its starkest form, you have to dig deep into US government budget documents. The US financing relationship with the Bretton Woods institutions is contained in the budget and activities of the International Affairs division of the US Treasury. It was the Treasury that played the leading role in negotiating the details at Bretton Woods (with the likes of John Maynard Keynes, who represented the UK’s interests), and the agency continues to lead engagement with the IMF, the World Bank, and four other MDBs that emerged after Bretton Woods. As a result, Treasury’s “International Affairs” budget provides a useful measure of the scale and breadth of US engagement with these multilateral institutions.
As the figure indicates, this administration has taken an unprecedented turn away from the Bretton Woods institutions, at least in the years since consistent budget data has been available. Adjusted for inflation, the first two budgets of the Trump administration are the lowest, by far, of any of the past 30 years. Similarly, the Treasury Department under the Trump administration is supporting fewer multilateral institutions and programs than any previous administration of the past 30 years.
Among the programs abandoned during the past year: innovative and highly-rated agricultural development programs in the form of the International Fund for Agricultural Development (IFAD) and Global Agriculture and Food Security Program, as well as support for the climate finance agenda. Though the latter might not be a surprise for this administration, it nonetheless marks a striking diminishment of US engagement and influence over a leading pillar of multilateral cooperation today. Increasingly, rejecting multilateral cooperation on the climate agenda is tantamount to rejecting multilateral cooperation in general.
The precipitous fall in the US Treasury's multilateral engagement is all the more remarkable in contrast to the experience of the Obama administration, when multilateral financing, in scale and breadth, reached its highest levels of the past 30 years.
Skeptics of global cooperation no doubt see the current trajectory as a welcome course correction from the Obama years. But they would do well to appreciate the costs of going it alone. This can be measured by the financing leverage that we are giving up when we cut multilateral funding, such as with IFAD, where every dollar contributed by the United States delivers nearly 80 dollars of assistance to developing countries. Harder to quantify are the potentially wide-ranging effects of not having the United States at the table to help shape multilateral strategies, standards, and priorities on issues that implicate a wide range of US economic, security, and foreign policy interests.
The irony of all of this is that an approach to multilateral cooperation that the United States itself designed nearly 75 years ago is enjoying remarkable popularity in the rest of the world today, and particularly among rising economic powers. China has garnered attention for adopting this multilateral playbook in the creation of the Asian Infrastructure Investment Bank and even in its overtures to other countries through the Belt and Road Initiative, which proposes to pursue infrastructure development across Eurasia on a massive scale by attracting and leveraging financing from a wide array of sources inside and outside of China. It is to our detriment in the United States that that kind of vision, once on display at Bretton Woods, is now missing in Washington.
Foreign aid advocates might be tempted to take heart from the budget deal just struck on Capitol Hill, which promises to create some breathing room for US foreign assistance as it boosts defense and non-defense spending. But it's important to take a step back and look at the larger picture. The fact is, the overall shift in the US fiscal position, driven primarily by last year's tax cuts and furthered by this spending agreement, suggests that developing countries will be net losers by orders of magnitude that swamp the entire US foreign assistance budget.
Congress and the Trump administration are now pursuing an aggressively expansionary fiscal policy at a time when such an approach seems nearly guaranteed to drive up interest rates. The ripple effects of this directional shift for the developing world will accelerate and exacerbate a trend toward higher costs of borrowing for developing countries and more limited access to capital markets.
These trends could capture large emerging market economies like Brazil, Mexico, and India. But they will also likely affect a new class of borrowers that includes much poorer countries like Rwanda and Ghana, who will be swept up and ultimately pushed out of bond markets as they find no takers for their debt.
According to World Bank statistics published this year, total external debt stock of low- and middle-income countries globally is currently nearly $7 trillion and represents a deteriorating position for these countries. Debt sustainability is becoming a problem for a growing number of developing countries, a risk identified most recently in the IMF's January update to its World Economic Outlook.
The risks are clear enough. Even an orderly and measured increase in the cost of borrowing for developing country governments and firms will squeeze government spending on poverty-reducing expenditures and slow investment in productive economic activities. And disorderly shocks and spikes in debt flows to these countries could destabilize their governments and set back economic progress over a longer period.
Of course, US fiscal policy is just one factor affecting developing country debt, but it increasingly appears to be an exacerbating factor. More spending in the United States on foreign aid is not the problem. Representing less than 1 percent of the budget, steady and even higher amounts of aid spending can easily be situated within a more responsible fiscal policy. But current US fiscal policy is being pursued with seeming indifference to its macroeconomic effects in the United States, let alone for the rest of the world.
I previously argued that the Obama administration's domestic response to the global financial crisis was its most important contribution to global development. In the same way, the Trump administration's fiscal policy may prove to be its most damaging contribution to the developing world.
US leadership in multilateral institutions such as the World Bank and regional development banks is flagging. These institutions, rated as some of the most effective development actors globally, provide clear advantages to the United States in terms of geostrategic interests, cost-effectiveness, and results on the ground. Restoring US leadership in institutions like the World Bank will mean giving a greater priority to MDB funding, which today accounts for less than 10 percent of the total US foreign assistance budget and less than 0.1 percent of the total federal budget. Prioritizing multilateral assistance in an era of flat or declining foreign assistance budgets will necessarily mean some reallocation from other pots of foreign assistance money, as well as an effort to address the structural impediments to considering reallocations.
From the testimony: “And while the United States was roundly criticized for its handling of this episode, I think much of that criticism was misguided in putting the focus on the short term bungling of diplomatic outreach, or Congress’s failure to pass IMF reform. Both are relevant, and I very much believe that action on the IMF quota package is critical in its own right, but the challenges to US leadership in the MDBs – institutions like the World Bank and Asian Development Bank where the US is the largest shareholder – run deeper and are longer term in nature.”
Clare Walsh, a senior official in the Australian Department of Foreign Affairs and Trade and the chair of the Development Working Group of the G-20, recently visited CGD for a round-table discussion with CGD senior staff. Afterwards I hosted her and CGD senior associate, Scott Morris, a former senior US Treasury official, on the Wonkcast.
What will you remember about 2017? The growing crisis of displacement? The US pulling out of the Paris agreement and reinstating the global gag rule on family planning? Or that other countries reaffirmed their commitment to the Paris agreement, that Canada launched a feminist international assistance policy, that Saudi Arabia finally let women drive?
CGD experts have offered analysis and ideas all year, but now it's time to look forward.
What's going to happen in the world of development in 2018? Will we finally understand how to deal equitably with refugees and migrants? Or how technological progress can work for developing countries? Or what the impact of year two of the Trump Administration will be?
Today’s podcast, our final episode of 2017, raises these questions and many more as a multitude of CGD scholars share their insights and hopes for the year ahead. You can preview their responses in the video below.
Thanks for listening. Join us again next year for more episodes of the CGD Podcast.
Treasury’s Office of International Affairs works with other federal agencies, foreign governments, and international financial institutions to strengthen the global economy and foster economic stability. The United States’ international engagement through Treasury supports our national economic and security interests by promoting strong economic governance abroad and bolstering financial sector stability in developing countries. Through Treasury, the United States exercises leadership in international financial institutions where it shapes the global economic and development agenda and leverages US government investments, while tackling poverty and other challenges around the world.
With two major announcements on trade and climate at November’s APEC meetings, the United States and China have leaped into a highly productive bilateral relationship in the economic sphere. It’s all the more striking then to hear the discordant tone struck around the Asian Infrastructure Investment Bank (AIIB).