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HIROMI AZAKI: Good afternoon. And welcome everyone to this roundtable on the future of the World Bank and the architecture of multilateral development banks. I'm Hiromi Azaki, director of the Einaudi Center-- Mario Einaudi Center for International Studies. And I'd like to take this opportunity to acknowledge the presence of the honorable Hisashi Owada, judge and former president of the International Court of Justice. Welcome.
He is giving a [INAUDIBLE] lecture tomorrow in the law school from 4:30. The title of his lecture is in Account of Japan with the Law of Nations and its Subsequent Evolution. Please find time to attend the lecture as well.
So today's event is one of the roundtable events the center often organizers. As you can see, this table is not round, but it's round in spirit. So it's a place for open and equal exchange among people with different points of view. In fact, the roundtable idea is at the heart of what we are trying to achieve at the center, both here on campus and internationally with projects like the global finance initiative of the center to bring diverse perspectives and new voices to the discussion of complex technical issues that matter for our collective future.
They think multilateral banking qualifies as a complex technical issue and one that cries out for examination from multiple perspectives. I'm not the only one who thinks that. If we walk the halls of the World Bank, you'll perhaps find experts in many, many different subjects and disciplines, not just economics and finance and civil engineering. And they don't always agree with one another.
Indeed, the Bank has changed a lot since it was founded more than 70 years ago to help countries recover from the destruction of World War II. Today, its main mission is to reduce poverty, especially in low and middle income countries, and that means it needs to wrestle with every sort of challenge facing humanity, from the environmental crisis, to conflict, to corruption, to human rights.
And that in turn, brings the Bank into contact and sometimes in competition with all sorts of other institutions and initiatives. Not just with regional multilateral banks, like the African Development Bank, the Inter American Development Bank, and the new Asia Infrastructure Investment Bank and Riksbank, but also with the United Nations and national governments and multinational corporations and local and global social movements.
Today, our panel will talk, and I hope argue about the future of the World Bank and this expanding universe, or maybe I should say multiverse. Our moderator is supremely qualified to facilitate this discussion. Ravi Kanbur is the TH Lee Professor of World Affairs at the Dyson School of Applied Economics and Management at Cornell. He researches and teaches in development economics, public economics, and economic theory.
For many years, he was a senior staff member at the World Bank, and he served as its chief economist for Africa. Among many other leadership positions, he is currently the board chair for the United Nations and universities World Institute for Development Economics and Research. Please welcome Ravi Kanbur.
RAVI KANBUR: Well, friends, thank you very much indeed for coming, and thank you, Hiro, for this opportunity to organize this event. So these are indeed momentous times for international organizations, the World Bank in particular, but more generally for multilateral development banks, and indeed, the international financial architecture. We thought it would be good to have an event which would take stock and look forward over the next 20 years or so to see how this structure would evolve.
We have with us a very distinguished panel to help us in this discussion. Caroline Freund, who is a senior fellow at the Peterson Institute for International Economics, and she is a former chief economist for Middle East and North Africa at the World Bank. Next, on the far side is Homi Kharas, who is senior fellow at the Brookings Institution, and he's the Deputy Director of the Global Economy and Development Program, and he's a former chief economist for East Asia at the World Bank. We get a certain theme going through this thing. We're all former chief economists, regional chief economists at the World Bank.
And then in the middle is Johannes Linn, who is also senior fellow at the Brookings Institution, and he's former vice president for Europe and Central Asia at the World Bank and also former vice president for financial policy and resource mobilization at the World Bank. Johannes has a very distinguished CV, but the most distinguished item in his distinguished CV is Johannes is a Cornellian. He received his PhD from Cornell in 1972, and we've laid out the welcome for you in terms of the weather, Johannes. So welcome back.
Well, let me say a few words to start off the discussion and to set the stage a little bit. As many of you know, the origins of the World Bank and indeed the IFM are in the Bretton Woods conference in 1944, but actually, the intellectual roots in many ways of the World Bank go back not just to 1944 but to 1919, when a young economic advisor to the British treasury by the name of John Maynard Keynes was sickened by the Treaty of Versailles, the role that that treaty played in squeezing the vanquished, the role that the victors played in squeezing the vanquished through reparations policy.
And Keynes argued that this was economically problematic, but politically, absolutely dangerous. He, in fact, resigned from the British Delegation and wrote a tract called "The Economic Consequences of the Peace." It was an angry young man's tract, but the ideas that he put forward there that after a war, you don't step on the vanquished. You actually rehabilitate and help to build up those countries.
By 1944, Keynes had gone from being an angry young man to actually being at the very heart of the British establishment, as indeed, the lead advisor, the lead intellectual architect at the Bretton Woods Conference, along with Harry Dexter White, who was President Roosevelt's right hand man at the conference.
And Keynes brought into play two issues. One is going back to the Treaty of Versailles, that what the victors have to do is to help the vanquished rehabilitate and reconstruct. And indeed, his proposal for International Bank for Reconstruction and Development, IBRD bears the words of it, actually capture his intent. The International Bank for Reconstruction and Development, what was now known as the World Bank.
So that was a political intent, but there was also an economic intent to this thing, which is that in fact Keynes saw the economic problem as being financing needs and financing availability and a gulf between the two. Or the financing what was in the US and Wall Street, or the needs were in Europe and in Japan. And the needs were all infrastructure needs, obviously, after a war, that the infrastructure had been destroyed in these countries.
And yet, there was no private sector appetite for bridging this gap. And so Keynes devised-- Keynes and Harry Dexter White devise the sovereign loan instrument, where lending would be backed by the nations of the world, indeed the victor nations of the world. And he devised a sovereign loan instrument. I believe loan 001 in 1948 was to France, and the Japanese bullet train and so on were all financed through this mechanism.
Well, you know, we look back now from 1945 through the mid 1970s as being the golden age of capitalism. And no doubt, obviously, many, many other factors are in play, but I think not just the institution of IBRD, but the intent, the mindset played a big role in that revival and the success of that period.
In the 1950s and '60s, as decolonization took place, and then the newly independent nations came onto the stage, the World Bank moved through its soft loan window to help these countries at concessional rates, lending to these countries at concessional rates. And you'll hear the term IDA, IDA, International Development Association. That's a soft loan window of the World Bank.
So here we are now 70 years after the Bretton Woods Conference, and the world, however, is very different from what it was 70 years ago. Actually, in one sense, it's the same. In three senses, it's very different. The sense in which it's the same today is that we have massive amounts of financing lying idle, estimates of many, many trillions of dollars in all the pension funds and so on just lying there, and tremendous infrastructure needs in developing countries of the world.
And yet, the market doesn't seem to be able to bridge this gap. That seems, to me, to be the similarity from 70 years ago. But almost everything else is different compared to 70 years ago, when in fact, there was a hegemon. There had been complete and total victory, and so on.
So here are three things, here are three differences between 1944 and today. Firstly, a gap has opened up within the developing world between the low income countries and a fast growing middle income countries. China, India all those countries are growing very, very fast, Vietnam, compared to group of countries in Africa and elsewhere, who are growing relatively slowly. So a gap has opened up between low income countries, who are often mired in conflict, and fast growing middle income countries.
Secondly, there are very important cross-border issues, which have come to the front of the stage, which weren't present in 1944, at least not in the thinking of the people, climate, refugees, water, CO2 emissions, et cetera. So these very important cross-border issues are an integral part, not just of the global economy, but of the development process itself.
And thirdly, we are no longer in a world with a single hegemon. We're in fact in a multipolar world, and it's no longer the case that the World Bank is the dominant development bank in the world. As Hiro mentioned, we have the regional development banks, the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and on and on. And there are sub regional banks, also. And there are new ones coming up. Hiro mentioned the AIIB, the Asian Infrastructure Investment Bank, the Riksbank, and so on.
So the question arises, firstly, narrowly for the World Bank, given its history, given the intellectual history, how should it now operate in a world in which there are many other players, which are trying to do the same thing? But actually, there's also a question for the global financial architecture. How would we, if we were now charged with designing the global financial order, what sorts of principles would we apply, and what would-- how might the thinking of Keynes be helpful to us?
So those are just some stage setting comments, and what we're going to do is to move to a first of all to Johannes Linn, who will talk about the broad structure in terms of multilateral development banks. We'll then move to Caroline Freund, who will discuss a specific case of the World Bank and tell us some of her thoughts in that topic, and then Homi Kharas will broaden the discussion, not just to the multilateral development banks, but to the UN specialized agencies, which are also now part of the landscape in a way that they weren't 70 years ago. So that's the plan. Thank you very much.
JOHANNES LINN: Well, thank you very much, Ravi, and particularly nice to be back home, so to speak, since I spent four years of my life here. It's a long time ago. But in fact I was telling Homi on the way down from Syracuse, it was September 1968 that I took the bus down coming over from eastern New York state to come first time to Ithaca. So it's brought memories back.
Anyway, the weather is great. Thank you very much for reminding me also of what April is like in Ithaca. And with that, let's proceed. So I have four points that I want to cover. First of all, some general observations about multilateral development banks, just to make sure we're all sort of on the same page in terms understanding what we refer to and how they function, because actually, how they function, how they're structured is actually quite important to understand, what's their value added if you wish.
Then I want to talk a bit about the challenges they face today, picking up on some things we've already heard, talk about what I see as the opportunities they also have, and then briefly a few words about the way forward, is there still a role, and if so, how could it be improved upon in terms of where these institutions are coming from, and where they might be going.
So with this, let me first, a few general observations. When we talk about multilateral development banks, I generally tend to think about sort of the five core traditional core multilateral development institutions. This is the World Bank Group, which Ravi already referred to, founded in 1944 for the reconstruction of post-war world, Europe and Japan, but then switching, when that actually was taken over, that function, the reconstruction function by the Marshall Plan, switching fairly early over to the development function.
The World Bank, this was the IBID, the International Bank for Reconstruction Development. It was joined in 1956 by the International Finance Corporation, which was specifically focusing on private sector, financing private sector investments, and then in 1960 by the International Development Association, which funded particularly, supported particularly the poorest developing countries.
And I'll come back in a minute to sort of how these different institutions function. There were, however, then also regional development institutions. I guess the model caught on, and so with the Inter-American Development Bank was founded and '59, the African Development Bank in '64, Asian Development Bank in 1966, and the European Bank for Reconstruction Development, also known as EBRD, was found in 1991 after the fall of the Soviet Union.
Now, the key objectives of all these institutions were basically, as we already heard, were economic development. Later on sort of in the '70s, '80s, it became social development also, education, health, and so on was added to infrastructure. During the '80s and '90s, an explicit focus on poverty reduction in the developing countries, and then perhaps in the sort of late '90s and into the 2000s and now, a focus also on global public goods and regional integration and cooperation in support of regional development in developing countries.
So this is the universe I am focusing on. But I will also mention other development banks as we talk about these in passing in a minute. So what's the institutional model? And I think it's important to understand how these organizations function. All five multilateral development banks have what you might call a core institution. In the case of the World Bank, it's the IBRD, the International Bank for Reconstruction Development, and similarly in the other institutions you have, the banks so to speak, that were first founded and at the core.
These banks make loans to creditworthy governments. That's important. They are funded by borrowing in their international capital markets based on capital contributions from the member countries. Part of it is paid in capital, but part of it was called callable capital, which is only called upon for payment if the dire need should arise, which one hopes will never do.
And so the member countries actually fund them. The member countries are distinguishing between borrowing countries, recipient countries, and non-borrowing countries. And the non-borrowing countries traditionally have been the OECD countries, the wealthier countries. Industrial countries also sometimes called, who provide the capital, so that these banks can borrow into national capital markets, and then can on lend to the developing countries.
Now, this capital structure, combined with the fact that these institutions get what's called a sovereign guarantee, this means that the governments actually guarantee-- that receive the money, guarantee repayment, as a sovereign obligation, and what's called a preferred creditor status, which means that when the governments have trouble paying, they will first pay these international-- these multilateral development institutions. Only then, will they pay other debtors. That all combined means that these institutions all can borrow at very cheap rates at triple AAA, so-called AAA rates, which are the best rates in the international capital markets, and they pass these favorable borrowing rates on to their clients, which means in fact, the clients can borrow much cheaper than if they went directly into the markets.
So today, for example, the IBRD's lending rate is 1.31%. China, when it borrows for 10 years government bonds, is 3.35, India 7.7. So you can see the spread, the benefit that countries get from going to an institution such as the World Bank. And this is obviously an attractive proposition from the perspective of the borrower.
Now, this is what's sometimes referred to as the hard loan windows. You've heard already, Ravi referring to the hard loan windows. Then there are soft loan windows. This is the International Development Association, and the regional development funds that are associated with the regional development banks. Here, what's happening is that the rich countries, industrial countries, every three or four years, get together and make contributions, grants, in effect to these soft loan windows.
And these are then passed on to the poorest countries, the governments of poorest countries at zero interest, with only an administrative charge on top, so that the administrative costs are covered, and they are then on, at these zero interest rate loans, on lend, or in some cases, more recently also on lend as grants.
Now, the interesting phenomenon, however, is that in the process of negotiating every three years, for what's called a replenishment, this negotiation process is very much dominated by the donor countries, the rich countries. That actually has a major leverage, if you wish, on the policies of the institutions as a whole, because the donors say, if you don't do x, y, and z, in terms of your policies, the way you function in the developing countries, in the borrower countries, we will not give you the money.
So there is an incentive, of course, for the institutions to follow the directions of the donor countries. Now, note that does not include the recipient countries, at least traditionally, more recently some participation in these discussions, also by recipient countries. And willy nilly, what happens is the institutions at large, World Bank, IBID, over time also have to take on and do take on those policies.
So this is the driver here of the way these institutions are functioning, because of these soft loan windows, is that indeed, the overall institutions to a significant extent driven, not just by the capital structure of the hard loan windows themselves, but also by the way that donors can influence the policies, and the directions of the overall institutions.
Finally, I already mentioned the private sector windows, the International Finance Corporation. They provide these private windows, provide loans and equities to the private sector, at rates lower than also market rates. And indeed, again, they are paid for by-- the money is contracted by the borrowings in international capital markets, based on equity contributions from the member countries. Again, mostly industrial countries.
Now, in terms of the overall size, just to put it in perspective, the total borrowing or lending, I should say, of the five international MDBs was at about $100 billion in the last year or the year before, of which the World Bank contributed about half, so about $55 billion from the World Bank. Over time, this is likely to shift away from the World Bank, because the other developing-- the other multilateral development banks received bigger capital increases in 2010 than the World Bank, and therefore there's very likely to be a relative shift away from the World Bank to the multilateral development banks.
Now, very briefly, just to say a few words about the model that we have here, first of all, very important the financial leverage that comes with this model. In other words, for every dollar, and this is a US treasury estimate, for every US dollar that the US puts into the multilateral development banks, actually on the order of $25 being lent out. This is the leverage that this provides compared to a $1 grant that USAID makes, which is just $1. So there's actually tremendous leverage.
In addition, these institutions also have a strong track record of performance, in terms of quality. Homi Kharas and a colleague did a comparison of quality of performance of different agencies and found the multilateral development institutions and banks are actually among the best.
And also a very strong crisis response. During 2008 and 2009, the big financial crisis, actually the multilateral development banks provided more funding to the developing countries than the IMF did at the time, which of course has the emergency funding responsibility.
Finally, let me say there's an really interesting phenomenon that there is in fact following the example of these multilateral development banks, a lot of copycat institutions have developed. You have the European Investment Bank, which serves the European countries, the EU countries, which is actually bigger than the World Bank, at this point, with $80 billion of lending last year.
You have a similarly for Latin America. You have a Latin American Development Bank. The membership is Latin American countries here. You have the Islamic development bank. Each of them, the Latin American Development Bank and Islamic Development Bank, about $11 to $12 billion.
You have the new banks, the BRICS Bank that you may already heard about that the BRICs countries got together to create their bank, so to speak, and the Asian Infrastructure Investment Bank that were both set up last year, both functioning exactly the same way.
So if you ask, looking ahead now, does the model of multilateral development banks, have something to contribute, I would say very clearly, because in fact, you see that model replicated in new institutions being set up, and indeed, I think there's, from that perspective, a lot of hope.
Now, I promised to say a few words about challenges which the multilateral development banks face. First of all, and I think that's perhaps the difference also from sort of the '50s and '60s and particularly today. If you look at poverty rates around the globe, and if you look at the number of poor countries relative to middle income countries and high income countries, poverty actually has fairly dramatically dropped, and the number of poorest countries actually quite a bit lower.
So the question arises and is being asked in many of the traditional donor countries, why should we worry still? Why should we support development assistance, in general, but also these multilateral development banks? So there is a shift here, and the question of if poverty reduction is the big objective, do we still need those institutions to the same extent as we did perhaps 10, 20, 30, 40 years ago?
Secondly, and I think, also, Ravi mentioned it, a lot of other channels, financial channels have sprung up. Private finance flow is much bigger now than they used to be in the '50s, '60s, '70s. Nongovernmental flows, you've all heard about the Gates Foundation, which provides huge amounts of funding, but lots of other sources of NGOs and foundations, churches, of course. So-called vertical funds. You may have heard of the Global Fund of AIDS and TB and malaria, which is funding on the orders of 10 billion more every year.
New donors, China, in Africa provides more money to African countries than the World Bank, and Central Asian countries. China is just totally out of this world, relative to the traditional donor. So there are new donors and China among them, in particular. And finally, within the traditional donor countries, there's a lot of pressure to actually reinforce the channels that go through the bilateral agencies, rather than channeling money to the multilateral agencies.
So we have competition here, if you wish. And as Ravi said, the World Bank, for sure, is no longer the most important flagship organization, although it still is playing a significant role. But there is also another sense of competition, and this is the competition in the knowledge domain. So one of the reasons these multilateral development banks have become quite important is because not only did they provide money, they also provided what sometimes is referred to as knowledge, technical device, support in doing project preparation, monitoring projects, and of course, doing development related research, all important functions.
However, today, they don't have a monopoly in this area either. You have universities. Think about Cornell. You have think tanks. You have consulting firms, McKinsey and Company, and so on. Not only that, but you also have in the developing countries today, a much stronger intellectual knowledge base, capacity, than you had say 20, 30, 40 years ago. So the comparative advantage of these multilateral institutions in that regard is no longer quite as clear.
A fourth area where they are problems is that the governance structures of these institutions, the World Bank in particular-- and maybe we'll hear more about that from Caroline-- is very inflexible. So you still have this division between north, south, between industrial countries and recipient countries, at a time when that is probably no longer appropriate. Moreover, the membership and the ratios of votes and capital in these institutions has not sufficiently adjusted to the growth of China and the other emerging market economies, so that they actually can take on the role within these institutions they deserve.
Finally, just in terms of challenges, the renewed East-West tension that we see, whether it's between Russia and the US or China and the West, and so on, is also now seeping into these institutions. And so that is an issue. I know time is short, so one more contribution here on opportunities.
First of all, and we'll probably hear more of that from Homi, the post 2015 agenda of the sustainable development goals, and of course, the global climate goals from the Paris summit last year. These are very important global community goals that the institutions, the MDBs have committed to respond to, their huge financing needs. This is what we heard already. And these are now articulated in these sustainable development goals and climate change goals. And the MDBs in my view have a critical role to support the achievement of these goals over the next 15 years.
Secondly, the MDBs have a model, and the model has been tested, of combining financing leverage with high leverage, as well as technical assistance that will in fact, I think, stand them in good stead. And finally, I believe in a world where we see a lot of centrifugal forces now, I actually think there's a very good reason for still having institutions that are global in membership that are north, south under one roof, and so I believe from that perspective, too, they will have an important role to play.
There are things that need to be done to fix those institutions, the governance issue already mentioned. They clearly have to work together, not only among them the five, but also with the new institutions. And they need to focus much more on global public goods and regional cooperation integration. So from that perspective, I think there are things to be done. But I think there are also real opportunities. Thank you, Ravi.
RAVI KANBUR: Thank you very much.
CAROLINE FREUND: Let me start just by thanking Ravi and the Enaudi Center for organizing this conference. I think it's actually an interesting time to discuss these issues, because exactly what Ravi said at the beginning, the world has changed so much over the last 20 years or so.
And it's changed in two really important ways from the perspective of the development institutions. One is the poverty goal was actually met early. So this is rare. Usually, especially governments, you set a goal, and it takes time to get there. In this case, it was set early, and within the last 10 years or so, one billion people or 20 years, one billion people have been brought out of poverty.
And much of this was owing to the rise of China. So that's the other way in which the world has changed dramatically in recent-- really over the last 10 years. China now has the real production of goods and services is equal to the US. So the per capita income isn't, but China is as big an economy as the United States is.
So these are two really, really big adjustments, and it relates to the point Ravi made at the beginning about three groups. So you have the rich countries, these fast growing emerging markets, and then some poor countries that really haven't caught up at all in Africa. So you have a changed poverty map, but you also have a change in the focus of institutions in some sense that the World Bank, the IMF, the Bretton Woods institutions were an Anglo American phenomenon. They were thought up by Keynes and White, as was mentioned.
So there's two big differences. The poverty map is different, but also the Anglo American view isn't necessarily the dominant view in the world anymore, and there are other-- the emerging markets want more power on the scene. So how does that change the institutions and the institutional setting?
In White and Keynes' time, I would argue that the way they thought about it, because of the reconstruction needs, was finance, some coordination, maybe thinking more on the IMF on stability issues And maybe knowledge as an afterthought. I think it's completely reverse now, and the value of the institution, especially the World Bank, is really knowledge first, then coordination, and thirdly, finance, precisely because there are so many other institutions out there that are doing finance now, or maybe it's just at this particular point in time when overall interest rates are so low.
But I really just want to talk about three things, the first being finance. Then I'm going to talk about why I think knowledge is so important, and then finally, the third is coordination issues where the bank has already served a really important purpose, and I think could go much further in that direction.
So in terms of financing, when we think of development, usually, we think about the road that needs to be built or the power plant that's needed for electricity, or something like that. But a lot of development is really about getting the incentives for businesses and people to act in the interest of creating jobs, making the economy bigger and such.
So World Bank lending has actually shifted in recent years away from just the typical type of infrastructure lending to what we call development policy lending, which is money to help countries adjust their policies towards more growth enhancing policy. So it might be help with the education system or help in changing the tax system, or things like this, which, really, money to allow the government a bit of space, while it adjusts to a different type of regime.
But in terms of lending, if we think about the amounts, in the five years from 2011 to 2015, IBRD, so the standard hard loan arm of the World Bank was 105 billion, IDA that's the softer side, for the poorest countries, was 89 billion. And among the IDA lending, about half is to Africa. The IBRD lending goes mainly to the middle income countries.
But if you want to put that money in context, it's really not that large. Greece's bailout alone, for little Greece, was over $250 billion. The World Bank is only about a fifth of development, official development assistance now, and private capital flows dwarf development assistance. As it was mentioned, China's lending to Africa is much greater than the World Bank alone.
So finance is useful, but there's a lot else out there. There's a lot of other institutions out there that are also in this space. Why do I think knowledge is so important? The World Bank has become the premier source for data, research, and expert advice on developing countries.
So while I would agree that McKinsey is out there writing reports, they're not making all their data freely available for anyone to use, nor are they making the results easily accessible. They also are only researching areas, in general, that they get paid to research. So the World Bank is doing the work that no one else would do, and it's doing it globally, so it brings it together.
Open data allows you to diagnose problems. So just to give an example, Doing Business was created while I was at the bank. I helped work on the trade part of the Doing Business report. It's a report that started by telling you how many steps you need to start a bakery in every country in the world, or above a certain size.
What this kind of data tells you is how easy it is to start a business in different countries. Now, countries vie to be ranked high on the doing business indicators. This has greatly increased the demand for assistance on private sector development. So unless you can diagnose the problem, you can't really address it. So the World Bank came up with a new way of measuring, put the data out there, and that has caused countries to come and want to change the way they were.
Data from the World Bank on household surveys looks at things like what proportion of the population has how much of income. So when you hear statistics like the middle class is shrinking, the middle 20% used to have 15% of income. Now it has 12% or something like that. These kind of numbers around the world typically come from the World Bank. What is the top 1% of the population take?
Now, when people have that information, they have a sense of what the government is doing that allows them to go and say, hey, we need better redistribution, et cetera. Putting that data out there also allows for much more innovation because researchers from all over the world can use the World Bank data, so it ends up leading to more innovation than data that's kept close to your heart.
So the data really, it cannot be underestimated how important this is for development. Any time you want to look up oh, what's the per capita income in Tanzania, I can't remember, or something like that, you search it up, the first number that's going to come up is a World Bank number. And this allows you to think about where countries are in development. It allows the population to know how income is being distributed across all these kinds of things that help you to get the policies correct.
OK. So I think the next step in this information age that we're living in is moving towards big data. So the World Bank has a lot of data that hasn't even come out yet that it could put together. So I was also involved in a project where we put together data on annual trade transactions by firms across 50 developing countries over a long period. This is the exporter dynamics database, so this is a huge database with millions and millions of observations. But it allowed us to learn things that we never knew, how important individual firms are in trade.
We learned that one firm is 15% of exports in a typical developing country. So there are so many ways in which the World Bank, because it works in so many countries, can put data together that is useful for researchers, for the countries, for the people in those countries to understand how development, many development issues.
Finally, let me say a word about coordination. One thing is OK, well, we have regional development banks. why not let them do this work, why do we need a World Bank. From the data perspective, I think it's easier to have the one source. But I also think there are some issues that are global at its core, or where you can leverage risk, because the World Bank is working in so many different countries that you're not subject to regional fluctuations.
So just to think about this a little bit, the World Bank has been at the forefront in a number of areas, where I think there are really important spillovers from one country to another or from one region to another. So I just wanted to give some examples, because unlike the WTO, where it's clearly there to solve a coordination failure, otherwise every country would kind of raise its own tariff, we know there are optimal tariffs out there, but this allows us to coordinate in a better world.
The World Bank's main function isn't coordination, but there are really important development spillovers that can only be learned in global institution. So one is an issue that many countries are struggling with, aging. The World Bank was one of the institutions at the forefront of kind of developing what kind of pension system works best. The term, emerging market, actually, my understanding is it was developed at the IFC.
So the IFC came up with the idea of an emerging market bond index with presenting this to private sector investors, except they were calling it the third world Bond Index, and the private sector's investors said, well, that's not going to sell very well. It sounds like something really, really dangerous and risky that you wouldn't want to be involved in. And they changed it to emerging market.
They were also the first to issue a renminbi bond, the first to do a carbon trading bond. So there is a lot of areas where the World Bank can leverage, because it has so many countries in different regions. The idea of an emerging market bond index is great, because you're mixing the risk in Latin America with the risk in India, with risk in China, et cetera.
So there are a lot of ways in which I think you do need a global institution at the forefront. I have some other examples, but in order to have some time for questions, why don't I just conclude? There is a very important financial need for the bank, especially in the least developing countries, the IDA countries. Even if that population of countries is shrinking, that means, you know, the bank is working. It's the doctor who cures the patient. That's a good thing.
But we still need to do that kind of lending, and the World Bank has the best expertise. The banks often work together, so when I was working in the Middle East and North Africa, right after the Arab Spring, we did a development policy loan in Tunisia that was jointly done with the African Development Bank. So the banks can even learn from each other, and I think the competition is good, because it keeps everyone on their toes, but we do need some finance.
But the big changes, I would say, are this greater focus on data and knowledge. The budget for research, data, and knowledge at the bank is not one of the biggest budgets in the bank. And I think that could be greatly enhanced. It's a huge, huge service to the world, to researchers, and to the populations.
And finally, more work on global coordination, on issues where coordination or spillovers are happening, especially at the global level. And I'll stop there.
RAVI KANBUR: Well, so we went from Johannes' broad description of the landscape to Caroline's review of it through the perspective of a particular institution, the World Bank, and now Homi is going to take us back to the broad perspective, bringing in the United Nations specialized agencies, as well, which are a very important part of the landscape as well. Homi.
HOMI KHARAS: Thank you, Ravi. So I wanted to start just by reminding everybody that what we're really talking about with all these organizations is some kind of instrument or mechanism for collective action. And this is important, because if you go back to the agenda for development, and as Johannes said, we've just had 193 countries at the UN agree on an agenda, specific goals, 17 goals, 169 targets, for sustainable development until 2030.
That is the agenda, the universal agenda for development. If you look at that agenda, you'll see there are a number of targets, which are specifically about implementation, and when you count up those targets, you'll find that about 2/3 of them refer to collective action in one form or another, and about 1/3 are about what countries are doing individually.
So we've got this apparatus now to say there are a number of things that we want to do in terms of collective action. And what kind of collective action is it that the world is demanding? Broadly speaking, it falls into three categories. So you've got a bunch of things which is about do no harm.
So we used to have a world before Keynes where you would have countries competing with each other on currencies. You've heard about currency wars and competitive devaluations. None of that worked very well. Countries competed with each other on tariffs. We had trade wars. None of that worked very well. Today, when you want to think about, well, should you be doing investments in land or water, you know, there has to be some kind of a sense of is this actually going to do some good for sustainable development in terms of the regulation.
So you need to have some bodies that actually establish what are the rules of the game, which won't damage development, and won't damage other countries. A lot of that is what I would call just norm setting. So you need to have policies and principles about who sets the standards, so we can say this is appropriate investment in land, and this is actually land grabbing. This respects communities' rights to water, and this is actually just gouging and exploiting a natural resource in places where governments are weak.
So that's one whole branch of development activities. It's a do no harm branch. A second branch is actually a little bit of the reverse. It's do some good. And that's what I would call the classical, multilateral development bank. This is where you build infrastructure, you improve institutions, you do things that individual current countries will help them actually make some progress.
And then the third body goes under this heading of global public goods. It's basically areas where you literally need all countries to work together, because otherwise, it doesn't-- things don't work. It's the so-called weakest link in the chain approach to development. So carbon emissions are the most classic example. But you have to add to that, things like pandemic disease. And look at what happened with Ebola and the outbreak. If you have it happening in a weak country, and it takes hold, it affects all of us.
Who's going to manage the oceans? Another classic example of a global public good. Now the reason why I'm highlighting these different things is that the first, the norm setting, and the third, the global public goods, actually depend on grant finance. There's no revenue that's associated with any of these things that you can use to pay back anything. It's only the second that do some good, where in some sense, a country will then have a little bit more income and can afford to repay.
And that sharply differentiates the operations of the World Bank from other entities, which are operating in development, in particular, the UN Development System. So today, in the UN Development System, you've got 34 agencies, and they've gotten annual budget of about 45 billion, $45 billion a year. This compares with IDA, which the last number I saw for net lending from IDA was somewhere around 9 to $10 billion.
So it's this massive thing, but importantly, only of that 45 billion, only 2 and 1/2 billion actually finance core activities. All the rest is actually going for very specific purposes. And this is actually the new mechanics of how development financing operates.
Development financing used to operate with let's create an agency or an institution that will do some good with development and give it some money to do something and leave it up to these guys to do it in a reasonably effective way. We've moved completely to development by goals and targets. Let's specify a problem and put money into addressing that kind of problem.
What that does is it might give you more resources for a particular issue, but it takes away resources from larger issues of a system strengthening. And importantly, it takes away issues from global public goods and from norm setting. So today, we have a WHO, that sets standards, international health regulations, for what should be done, what should countries have in terms of their health standards to make sure there are no pandemics.
But there's no surveillance. Countries self report, and they say, we're doing terribly. Yes, we agreed to have all these health regulations, but we can't actually afford to do anything about it. And there's nothing in the system today that actually provides them with that help and money.
So what I'm driving at is that you have now the multilateral banks, who are operating, but operating only in a very small part of the system. And they're not operating in a part of the system where big challenges are now arising. They're not operating in global public goods. They're not operating in norm setting, and that's where the international community has started to wake up and say, this is where we need to do something more.
Now, the other big thing that's happened is that we used to have development as just one piece of international collaboration. So broadly speaking, the world divided up international collaboration into four areas, which they kept very separate from each other.
There was peace and security, which operated largely through the United Nations and largely through the Security Council. You had environmental work, which again operated through the United Nations and is all under this United Nations framework for climate change conventions, which has now come up with the COP 21 Paris agreement on environment. You had humanitarian assistance, and then you had development assistance.
These four things were always done separately. In today's world, there's an understanding that that makes no sense. You cannot achieve development if you don't have security. You can't separate between humanitarian assistance, which used to be let's go in, there's some big natural disaster, or it's a short term emergency. Today, 2/3 of all humanitarian assistance lasts for longer than seven years. That's no longer short term. It's already part of development, and obviously, the environment and climate change cannot be separated from development, because it's all about carbon emissions. It's all about what do we do about energy and transport and agricultural systems in developing countries, and that's the core of development.
So the big question now is not how do we keep these separate. It's how do we actually start to integrate these things. And that's starting to mean, we have to integrate the very separate pots of money that we had between these different types of interventions. So it's integrating the grants and some of the loans. That is proving to be extremely hard to do, because none of these institutions really work together.
There's an awful lot of discussion, and they all say, yes, we work together, and they can all come up with anecdotes about how they work with each other, but the harsh reality is they don't. Even within the same group, they don't. So you have this institution of the International Finance Corporation. It's part of the World Bank Group. And pretty much ever since I joined the World Bank Group in 1980, ever since then, there's been discussion of how do we get the IFC and IBRD and IDA to work more closely together.
It's never worked. It still isn't working. It's very, very difficult to do, because culturally, these two are quite separate kinds of agencies and institutions. So I would say you've got this very big system. Each has individual parts, which are operating and moving, but they're now trying to move in a slightly different fashion.
So we used to think of problems as being problems that would be solved by government agreements, intergovernmental agreements, and by public investments. And that was basically the model. It's still the model. That's the model of the sovereign loan instrument that Ravi was talking about. It's an intergovernmental agreement and a public investment.
But if you look at the last set of multilateral discussions, they are not legal agreements. They have a completely different theory of change. They have a theory of change that says, we want to harness the power of markets to actually change the way in which development happens. That means we have to change incentives and institutions. We're going to address climate change by making it efficient for firms to actually take on low carbon technologies, not by doing these investments ourselves by the government.
We're going to change the politics by having open data and having advocacy and having groups within individual countries try to hold their governments to account for why is it that development is happening so rapidly over there in the neighboring country, and it's not happening here.
And we're going to try to bring in companies with new technologies and innovation, because if we don't harness the power of science and technology, to be perfectly honest, we are not going to meet any of the development goals that have been set for 2030. So we need to have big changes in just the mechanics, the technical mechanics of how we do business. So that's the big challenge.
And that, I feel, is the question of how we take these institutions that were designed for quite a different purpose and now fit them into this new purpose. So for an organization like the World Bank, yes, it's about providing a certain amount of money, because if you provide some money, you can change incentives.
So if you want to really change the incentives for low carbon energy production, putting some money on the table, public money on the table, will be very useful. But it's not going to be the solution to the problem. It has to bring in and leverage and change the incentives for other organizations, particularly for business to come in and do that.
And then I want to close by also saying that if we continue with this process that we have of always trying to deal with the symptoms, rather than the cause, so we're now spending close on $25 billion a year on humanitarian assistance. We don't invest anything like that in prevention. There are all kinds of investments, and every academic study says the rate of return to these things is huge.
But somehow, the politics don't allow us to invest so that we can have systems that will tell us when there's a major storm or an earthquake coming. We just put in a tsunami warning system, but that was after the big Pacific tsunami. There was no reason why we couldn't have had that before. Placing food stocks across the world.
The World Food Program was never allowed to buy food in advance. They could only buy food-- this is the big organization to actually provide food to countries in crisis. They could only buy it when there was a crisis. Well, guess what, if there's a big crisis because there's been a shortfall in supply in the major countries, like the US or Australia, what happens to prices? Prices go up.
So the World Food Program was always buying when prices were high and distributing. That's clearly not an efficient way of organizing this. So there are big opportunities at the moment, I think, for saving on development, which is lucky, because we're at the same time, faced with an environment where the ambition of the agenda is so much larger than ever before, and all these organizations have to operate in an environment, where there's more and more squeeze on their resources and what donors are prepared to do.
And if you don't have a very compelling statement, going to a donor and saying, I'd like you to give me some money, because I can generate more knowledge about development, you'll get zero. And that's part of the problem that many of the multilateral institutions have right now. Nobody is prepared to actually fund the kind of public goods that they're providing. They used to fund it by cross subsidization from other activities. But that cross subsidy has fallen, as their earnings have fallen.
RAVI KANBUR: Thank you very much. So [INAUDIBLE] we've had three very interesting presentations. I often wonder what a Bretton Woods conference for our generation might look like, what a Bretton Woods conference this year might-- how it might be different from that in 1944. One thing's very clear is that the problems we face seem, at least to me, to be more complicated than those faced by Keynes and Howard Dexter White. I mean, I know it was the end of the Second World War and so on.
But just think of the economic structures and so on that have been described in this panel, and the coordination issues and so on and the global public goods, et cetera. I actually think we live in much more complicated times, and hence the challenge that we face so let's have some more discussion and so on, and please, some comments and questions from the audience. Yes, please. Yes.
JOHANNES LINN: I think, is a very, very important question is how do we actually get collective action. There are different ways you can try and do that. One is sort of the most common perhaps. In the 1990s and 2000s, a lot of countries, what was set up was a donor coordination framework and process at the country level that even joint country assistance strategies that were developed by the various donor organizations, basically, one tried to sort of coordinate everything that everybody was doing at the country level.
There were two problems with this. One, it actually excluded governments very often. So it was basically donors trying to coordinate with each other. And one of the lessons from that was that you really had to bring in the government, number one. Number two, ideally, in fact, the government was going to lead that effort. And if you then go to countries like China or India, so countries with strong capacities, they actually do that coordination, and the individual agencies come in, and they do their different stuff. But it's actually the government that coordinates and in a way reduces the need, if you wish, for coordination among agencies.
Now it doesn't necessarily function all that well either when you have different ministries working with different agencies and the ministries don't coordinate effectively, and the government actually doesn't do its internal coordination. That is a problem in these countries, just as a team. However, the one lesson has been that basically government should be in the lead of the coordination process.
The second lesson is that it's much more effective to coordinate on the ground among different agencies if you actually focus on not so much on the overall country engagement by everybody, but you actually take some groups in particular sectors. So you get agencies and the ministry together or ministries, in some cases, that work in a particular sector, whether it's agriculture, whether it's transport and whatever, and you focus your coordination efforts on that particular sector and subsector.
Now, that doesn't work well necessarily also. I was just recently in Tajikistan, Central Asia, and lo and behold, there, the Global Fund for HIV/AIDS and tuberculosis and malaria had been working with UNDP. Actually UNDP administered the funds to try and control malaria and TB and HIV/AIDS. And they've done that for 10 years or so.
Well, just as I was there, actually that UNDP and Global Fund learned that USAID had just decided to go in with a major project that was basically duplicating significant amounts of work that had been carried out. So you even in narrowly focused areas, you get incentives within organizations that prevent and get in the way of coordination.
However, I still, from my own experience in the field, in countries and working with different donors, I feel that's government led and focusing on specific subsectors, sectors or subsectors, and trying to get the term that's been much abused to the coalition of the willing, if you wish, together to actually have, where they have common interests and actually working together is the way to go.
RAVI KANBUR: The next set of questions, response, comments.
Thank you. Responses to that? Homi, in terms of a single target versus 169, what do you say to that?
HOMI KHARAS: Well, one of the goals is end extreme poverty, which actually comes very close to Jim Wolfensohn's, you know, original thinking, and the various dimensions of poverty are then spelled out later. They incidentally also include things like personal security, which have not traditionally been part of what development organizations did, but turn out to be something that people living in poverty raise as one of the major issues that they face, along with other things, like legal identity and things like that that allow them to participate in various governments.
I fully agree with Gary. I think that there's a huge agenda now about ending poverty. I think there's a tremendous and very exciting opportunity. It is something that is technically and financially feasible, in my view, by 2030. But it would act-- it will actually require a considerable amount of effort, and we're not on track.
If you look at things like nutrition statistics, if you look at some of the non-income dimensions of poverty, we're quite far off track in some areas, in some areas much more than others. Gary, you mentioned clean water. I would also put into that, mix sanitation, which is probably the one where we're having the most difficulty in really making advances.
I do want to say one word, if I may Ravi, on collective action, because I think that one of the interesting things about all of the institutions that was set up after the war was that they were global institutions, by and large. And one of the things that's happening now is that regional collective action turns out to be something, which can solve often a problem.
And so you're getting a proliferation of institutions precisely because it's easier to have a discussion and a dialogue amongst neighbors and to gain a consensus amongst neighbors than it is to gain a consensus globally. And particularly, in a world like today's world, where there are such different views of how development can be achieved.
It's really hard to get a global consensus. So you will see lots of places, either regionally or increasingly, even sub regionally, you know, there's the ASEAN countries will say, well, this is the ASEAN way. And the ASEAN approach towards, let's say, how they deal with Burma or Myanmar is quite different from the way in which a global institution would deal with them.
So many of these kinds of things I think are up leading to people saying well, what is that coalition that we can bring that will actually help us deal with this problem, and that coalition is, you know, nowadays, in fewer and fewer instances, a global coalition.
RAVI KANBUR: Caroline, did you want to say something?
CAROLINE FREUND: No. I'll [INAUDIBLE] right now. Thanks.
RAVI KANBUR: Any other questions, comments from the audience? So I had an observation in terms of an institution like the World Bank, and going back again to 1944, and the absolute dominance of the Anglo American view. And of course, that is reflected in the governance structures of these institutions now. As you all know, the president of the World Bank is always an American, and the head of the IMF is always a European. This was the great carve-up in 1944.
And what's quite interesting is that the mindset of the US, for example, is still that the World Bank is important, that it's important to have an American as a president of the World Bank. It's important, as you know, in terms of the governance structure of the World Bank, 15% gives you veto power, and it's written in the Constitution. If you have more than 15% point something, you have veto power. And the US's share of the vote is about 16 something. So the US has veto power.
So now a very interesting situation arose a few years ago when India hit its borrowing limit with IBRD. And India said we need the money, please increase our whatever. They said, no, we can't, because you've hit your borrowing limit. Why? Because our total capital stock, our total capital is limited, this callable capital, et cetera.
So India and China said, fine, we'll put in capital. But if we do that, the voting share of the US goes down. OK, so the US of course vetoed that, because they had the veto of more than 15%. So we're caught in this trap, where these institutions need to expand. The US Congress is unwilling to put the money in, but it's unwilling to let anyone else put the money in either, because their share of the vote will go down.
Now in one sense that reflects how important in some sense they think this institution is. So the hope is that as these institutions become less important, over time, indeed because the world is growing, and the total capital of these institutions is not growing, I often say the World Bank financially is becoming irrelevant at the rate of 7% per year, because that's the average growth rate of these countries, where the bank's total capacity to lend is fixed.
So the hope, the paradoxical hope is that as the World Bank becomes less and less important, this notion of having total control of this institution becomes less and less important in the bank. And indeed, therefore we make it an efficient move, whereby India and China can put money into this institution, and therefore, actually make it more effective in this way. Yes, Johannes.
JOHANNES LINN: I'm glad you mentioned this case of the World Bank's capital replenishment being constrained by the US Congress and so on. Actually, the next 12 to 18 months, you'll be able to see this working its way through the system once again, because the current president, President Jim Kim requested that the annual meetings of the World Bank and IMF last fall in Lima, that there'd be a significant capital increase granted to the World Bank and the IFC and so on.
And the immediate reaction was quite negative among the members and especially the industrial country members, basically for the same reasons that you mentioned. Now, there's a process ongoing of trying to explore what actually should be the role of the World Bank over the next 15 years and why would the World Bank have to play a role that would require it to actually have a capital increase, so it can make more loans.
It'll be very interesting to see how this works out. The board of directors of the World Bank has been asked to prepare a vision for the future to the governors, which are the ministers of finance and development of the member countries, for submission this September in the next annual meeting.
And after that, by next year, a decision will have to be made, and it's going to be very interesting to see whether that same kind of sort of holding the institution back is going to be taking place, or whether the collective action, if you wish, and wisdom of the member countries sees that we not only need all these regional, subregional, and special funds, but we also need at least one or two institutions that actually can take action and support development and global public goods and climate change action at a global level.
From where I sit, I would hope they recognize the importance, but by no means guaranteed.
HOMI KHARAS: And just for balance, Ravi, the Europeans, I feel probably are as much if not more, to blame for the lack of governance reforms at the World Bank as the United States. So it's not just the--
RAVI KANBUR: No, absolutely, no, absolutely. The share of Belgium's vote reflects 1944. It doesn't reflect the share of Belgium in the world economy today. Yes.
CAROLINE FREUND: Yeah, I was just going to say that I thought more discussion might come up in the questions about the development of the AIIB, so as kind of competitor to the World Bank. And it also, I think, fits in with this discussion where the US government has been initially very negative on it not joining, actually encouraging others not to join and interestingly enough, the other industrial countries did decide, ultimately, many of them, to join the AIIB.
So we're in this world where China, India, countries that deserve to have their voting rights expanded didn't get them expanded, so what's the natural reaction in some senses is to start your own bank. And it'll be interesting to see if the existence of the AIIB does encourage, ultimately, more funding to the bank, or if we're really at a world where the power balance is shifting when the-- at Bretton Woods, of course, the US was a big predator nation, and the UK was a big debtor nation, and Keynes and Whitehead had kind of different views for how things would go, and now we have China, where there is a lot of funding available for infrastructure building around the world. So it's really an interesting dynamic, I think, between these two banks.
RAVI KANBUR: So let's draw things to a close. Those who were involved in the Bretton Woods conference and others spoke of being present at the creation. They were present at the creation of the New World Order. It was a new thing that they were creating. Well, we have the institutions that were created at that time, but clearly the world has changed. And I think we need to create an entirely new structure to deal with how the world has changed in the last 70 years. Let's thank our panelists for really excellent contributions.
The World Bank was set up by the victorious powers at the end of WWII as a bank to aid postwar reconstruction and development. Over the last 75 years, new institutions have been set up to assist in economic development, including for example the African Development Bank, the Inter-American Development Bank, Asian Development Bank and, within the last two years, the Asian Infrastructure Investment Bank and the BRICs Bank. What is the role of the World Bank in this new world? And what should the architecture of the system of Multilateral Development Banks (MDBs) look like?
Guest speakers Caroline Freund, Homi Kharas and Johannes Linn, with moderator Ravi Kanbur, addressed these crucial questions for emerging economies and the world economy April 4, 2016 as part of the Mario Einaudi Center for International Studies' Roundtable Discussion series.
