Daily Management Review

The World Bank is preparing for a transformation


The World Bank is shifting from the role of major development projects lender to the role of a private sector investment broker.

In April 2017, World Bank Group President Jim Yong Kim outlined his vision in a speech at the London School of Economics. He argued that financing for development must radically change in speed and scope, moving from billions of dollars in aid to investing in trillions of dollars.

Kim says that there are significant and affordable financial resources that remain on the margins of capital markets and can be invested in developing countries. Lack of knowledge of private investors about these countries means that these funds remain largely unused.

According to Kim, the World Bank should be an intermediary between the private sector and developing countries. Its main priority should be to not give money, but to reduce risks in developing projects and developing countries in general. To do this, the institution will promote a policy that will make patricular country and projects attractive for private investments.

Kim hopes that this will provide financing for the private sector, while at the same time will benefit poor countries and their people. In his view, the bank will mediate between the interests of the global market system, the governments of developing countries and people living in poverty.

As a broker, the World Bank will be able to provide a wide range of services, from investment and insurance to business consultations and lobbying policies.

Kim's idea is to shift power from traditional lending operations of the World Bank, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) to the International Finance Corporation (IFC).

IBRD, established in 1948, provides loans and counseling to middle and low income people, which are considered creditworthy. These loans are profitable even if IBRD does not try to maximize its income, but seeks to promote global economic and social development. IBRD is mainly financed through the capital investments of its 188 member states, as well as through the issuance of World Bank bonds.

IDA was established in 1960 and provides loans with low interest and grants to the world's poorest countries. It is funded by the so-called "replenishments" from donors every three years. The institution does not make a profit, but reduces poverty and promotes economic growth.

IFC, established in 1956, aims to involve the private sector in development projects around the world.

The role of the investment broker makes sense for the World Bank, if one takes into account the great political context of the development economy. Countries with low and middle income levels have become less dependent on World Bank lending, given increasingly attractive alternative sources of finance. The current US and British administrations prefer trade and business as opposed to development goals. Private financing in recent decades has quickly moved to other parts of economic activity.

In this regard, the World Bank runs the risk of losing positions if it does not respond to these trends. In addition, since the bank is defined as an institution that facilitates the investment of the private sector according to the constituent documents, its role as a financial broker indeed corresponds to its basic mandate.

The problem of poverty

However, there are two main problems on the agenda. First, why will the cost-effectiveness assessment of development activities be made taking into account the profitability of the private sector? As the French economist Thomas Piketty argues, the growing power of private capital markets is the driving force for income growth and property inequality.

Secondly, what makes this turn towards private sector solutions much more promising today than in previous decades, when Kim himself vigorously criticized them? In his speech at the LSE, he noted that the bank has learned from past mistakes. Nevertheless, risk reduction in whole countries for private sector investors probably includes policies such as strict inflation control, large-scale privatization, rapid trade liberalization and strong government cuts in social spending. In the past, they made the World Bank's lending activities knowingly destructive for developing countries.

In Bolivia, for example, the policy of structural adjustment under the terms of the World Bank lending since 1985 has led not only to an increase in unemployment and a decline in government revenues, but ultimately to riots across the country and rising prices.

Even if we leave aside concerns about the financial transparency of corporations that will be involved in the process, the changing role of the bank reflects an alarming shift in the development of the sector. And now there is a new risk that people living in poverty will be pushed out of sight.

source: theconversation.com