S1: Hello and welcome to Development Futures, a podcast brought to
S1: you by the Indo-Pacific Development Center here at the Lowy Institute.
S1: My name is Alexander Dayan, the deputy director of the center,
S1: and I am your host for this episode. In this podcast,
S1: our researchers and some of the world's leading experts discuss
S1: fresh policy insights and ideas on the most pressing development
S1: issues in the world today. In this episode, we will
S1: be talking about the future of the multilateral development banks,
S1: often referred to as the MDGs. More than a year ago,
S1: the MDGs embarked on an ambitious reform agenda for them
S1: to tackle the pressing dual challenge of climate change and development.
S1: Items on the agenda involve improving MDB governance structures, objectives
S1: and targets, and creating new financial instruments to mobilise public
S1: and private capital for climate and development investments. And this week,
S1: finance ministers and other officials from around the world are
S1: in Marrakesh for the world Bank and IMF annual meetings,
S1: where a lot of attention is put on the reform
S1: efforts in the work. So to discuss those, I am
S1: joined by Clemens Landers, a senior policy fellow at the
S1: center for Global Development who focuses on multilateral development banks
S1: and sustainable development finance. Clemens previously worked at the US
S1: Treasury on US engagement with the NBS and also at
S1: the world Bank. So she's basically one of the best
S1: persons to discuss those issues. I had the pleasure of
S1: meeting Clemens a few months ago, when my colleague, Roland
S1: Rajan and I presented our work on development finance at
S1: CGD in Washington. And since that time, we've had the
S1: idea of having her as a guest on our new podcast.
S1: And I'm thrilled that this has finally become a reality. So, Clemens,
S1: thank you very much for taking the time to have
S1: a chat today.
S2: Well, thank you, Alexander, and I'm so pleased to be here.
S1: First, I would like to look at the big picture
S1: and ask you the following questions. What do we mean
S1: when we talk about MDB reforms generally? I mean, what
S1: are the primary topics of discussion concerning those reforms and
S1: in the context of the world Bank, IMF annual meeting
S1: is happening as we speak. What do you think is
S1: being discussed precisely on that specific topic?
S2: Yeah. Well, you're right to point out that there's been
S2: a really strong spotlight on the MDGs since for the
S2: past year and the world Bank in particular about a
S2: year ago, actually, Secretary Janet Yellen, the US Treasury secretary,
S2: made a speech around what is now called MDB evolution,
S2: really focused on the fact that it was time for
S2: for some major changes within the system, with a particular
S2: focus on the world Bank. And she made she made
S2: the speech about a year ago at the center for
S2: Global Development. And this is really created an enormous amount
S2: of momentum, an enormous amount of political momentum around around reform.
S2: And there's been especially a lot of a lot of
S2: focus on the world Bank, which is which has been
S2: in a lot of ways accelerated by the fact that
S2: the world Bank also has a new, new president, AJ Banga. Um,
S2: so so what is meant and what what really drove
S2: drove the US Treasury secretary to, to start this whole process,
S2: I think was, was, was was really several things. Um, one,
S2: of course, was the Covid crisis really radically changed the
S2: global economic landscape. Um, we really saw a lot of
S2: countries really struggling to access capital markets and external financing.
S2: And the MDGs were really seen to be the global
S2: safety net. But their their response to Covid was was uneven.
S2: There's there's there's quite a bit of literature out there
S2: and including from from the center for Global Development just
S2: around you know, some for some countries, you know, disbursements,
S2: you know, weren't moving particularly fast. The institution for some
S2: countries was very good on the crisis response and for
S2: others was less good. And there's also a sense that
S2: that that the world Bank in particular slightly missed the
S2: boat on things like Covax, which was a multilateral funding
S2: for for vaccinations and simply because its own internal rules
S2: and procedures were too complicated for, for, for to participate.
S2: And it eventually actually did end up participating. But but
S2: just this feeling that that the world Bank really wasn't
S2: equipped for the challenges of the day, and if it
S2: was kind of missing the boat on the Covid crisis,
S2: what did that really say about the World Bank's response
S2: to the climate crisis, which in a lot of ways
S2: is like a slower, slower brewing Covid crisis, but equally
S2: as as existential in its nature? Um, and against that backdrop,
S2: there was also a lot of political changes afoot. Notably,
S2: you know, I've mentioned the United States quite a bit.
S2: You can see maybe a little bit of my Washington
S2: bias as I, as I sit here. But, you know,
S2: there were big changes in the US political landscape with
S2: with the election of Joe Biden and really, really sharp
S2: turn on in terms of foreign policy and economic policy priorities.
S2: And notably, you had you had an administration that was
S2: that was after the Trump administration that was coming in
S2: that really wanted to signal that it was multilateral, um,
S2: that that it was focused on international issues like foreign
S2: assistance and that it was also going to embrace the
S2: climate agenda. And so in a lot of ways, this
S2: really created a in a lot of ways, the stars
S2: were aligned for really big focus and a really big
S2: rethink of of the world Bank and the other MDGs
S2: by association. So what is what is what is kind
S2: of the meat? Meat on the bones here. You know,
S2: think it's a couple of different things, but in a
S2: lot of ways think, you know, you can this, this,
S2: this evolution. And we can talk about it a little
S2: bit further means a lot of different things to a
S2: lot of different shareholders. And there's not necessarily complete agreement
S2: amongst shareholders on on where the evolution and reform agenda
S2: should be, should be headed. But think a couple of
S2: areas where there is broad consensus and think this is
S2: the easiest and the hardest is the system is too small.
S2: The to the extent that the system is, is the
S2: global safety net and needs to be the source and
S2: should be the source of a lot of public global investment.
S2: These together, institutions that are together providing 100, $200 billion
S2: a year in financing. And that really is a drop
S2: bucket in the bucket compared to the climate and development
S2: challenges that a lot of low and middle income countries face.
S2: So that's that's one piece. The second piece is really
S2: thinking about how the these institutions can be more flexible
S2: and in particular, more readily to readily engaged on climate
S2: finance issues. And that kind of points to one of
S2: the complexities in these institutions models is that they're really
S2: demand driven institutions. It's not that the world Bank goes
S2: to a country and says, we want to invest in
S2: this project to the contrary, and this is really the
S2: kind of heart and soul of what distinguishes an MDB
S2: from a bilateral aid agency, for instance, is is it
S2: really is the country that originates the project and says,
S2: this is what we want to borrow for. So if
S2: there's this, this increasing realization that we live in a
S2: world where there are all these existential threats, you really
S2: want to think about how you're incentivizing countries to borrow
S2: to mitigate these existential threats, whether that's climate pandemic, you know, fragility,
S2: you know, kind of what's been put under this rubric of,
S2: of global public goods. And then the third piece, you know,
S2: and think this is getting a little bit less of
S2: a focus, but think remains incredibly important, is there is
S2: this unfinished business of development there? You know, we are
S2: nowhere out of the woods in terms of, you know,
S2: eradicating poverty, you know, think, you know, a couple of
S2: weeks ago, we had the Unga in New York. It
S2: was very clear how off track the international community is
S2: on pretty much every single SDG. So just as you're
S2: reinventing new missions for these institutions, you also have to
S2: ensure that they're staying in the course on their on
S2: their original ones. So, you know, that's a lot. So
S2: what is getting discussed in Marrakesh. And I really do
S2: want to emphasize think Marrakesh is really kind of the
S2: beginning and not the end point. One is, you know, these, again,
S2: are meetings that are particularly focused on the world Bank
S2: and not the broader system. One is that shareholders in
S2: the institution have endorsed a larger perspective on what the
S2: World Bank's mission is. So after many, many months of wordsmithing,
S2: they've decided to add the bank's original mandate. And the
S2: mandate is the twin goals of of eradicating poverty and
S2: boosting shared prosperity. They've they've they've agreed to add to
S2: a livable planet. So finance ministers who are shareholders in
S2: the institution are going to be formally endorsing this new mandate.
S2: So that's the big ticket item. But for many think
S2: that that simply isn't isn't going to be enough. It's
S2: it's the opening salvo in a reform process. But but
S2: a new mandate is in and of itself, not a
S2: reform agenda.
S1: Okay, well, putting aside this new mandate, then what do
S1: you view as the low hanging fruit of the reform agenda?
S1: I mean, what changes to the development banks do you
S1: think will be the simplest to implement with the highest impact?
S2: Well, think maybe maybe kind of going back to the
S2: financing side. I mean, think one of one of the
S2: lower hanging fruit is the fact that there was recently
S2: a report on this is going to sound very dry.
S2: So listeners, bear with me because I'll make this fun.
S2: But there was recently a report called the The Calf Report, which,
S2: which reviewed the capital adequacy frameworks of these institutions. And
S2: it basically found that most multilateral development banks manage their
S2: finances very conservatively. And because they manage their finances so conservatively,
S2: they're potentially holding back a lot of development finance. So
S2: one of the the interesting perspective that the authors of
S2: this report took was there were a few small changes
S2: that these banks can make, changing how they provision for loans,
S2: changing what's known as their equity to loan ratios, changing
S2: how they view something called callable capital, which I promise
S2: I won't get into. But a couple of things like this,
S2: actually not a couple of pretty sturdy list of things
S2: could be enough to really unlock quite a bit of financing.
S2: And so in a lot of ways, you know, this
S2: calf review and a lot of these findings are very
S2: easy ways of really increasing the amount of headroom that
S2: the multilateral development banks can be, then providing as loans
S2: to their client countries without necessarily having to go to
S2: shareholders to ask for more cash. The bigger difficulties in
S2: this reform agenda is everyone wants the institutions to do
S2: more and to change. But as you know, you know
S2: very well and everyone in the development finance space knows
S2: very well this is not a particularly this is not
S2: a particularly glorious time for general the generosity of bilateral
S2: donors to especially to multilateral institutions. So, so this, this,
S2: this capital adequacy review is kind of the way it's
S2: often described as the bank is, is a way of
S2: squeezing a little bit more out of the lemon and,
S2: and think in a lot of ways the institutions really
S2: have embraced these mean for some it's been a little
S2: bit too slow to embrace these reforms, but they have
S2: embraced these reforms and have put forward some pretty, you know,
S2: not enormous but good consequential new headroom numbers. I think
S2: the world Bank put out said that, that by implementing
S2: some of these reforms that could generate an extra 100
S2: billion over the next ten years. So some, some pretty
S2: good ambitious numbers linked to the agenda. So, you know,
S2: and so hopefully that's something that, you know, the the
S2: momentum on on that side will continue.
S1: Well very good. Now I would like to talk to
S1: you about the global public goods or the JRPGs that
S1: you mentioned earlier. So for our listeners, global public goods
S1: are goods and resources that benefit everyone. They are non
S1: excludable so no one can be excluded from using them.
S1: And they are non rivalrous, meaning that using them doesn't
S1: actually reduce their availability to others. Example of JRPGs include
S1: climate change mitigation, communicable disease prevention and global peace and security. Um,
S1: and the global public goods are, in my mind, at
S1: the centre of the MDB reform agenda, as the MDGs
S1: are under pressure to expand and adapt to address global needs,
S1: including through the provision of those global public goods. Now,
S1: the problem is that for some developing countries, borrowing for
S1: GPG programs at the domestic level can be challenging due
S1: to fiscal constraints, for instance, or different national priorities. And
S1: so to make these loans more appealing to these countries.
S1: Institutions like the world Bank may need to actually sweeten
S1: the deal, often involving subsidies, which translates into increased grant funding.
S1: But given the limited budget of organisations like the world
S1: Bank and other MDGs, allocating more grants for climate and
S1: similar global public goods could actually result in reduced grant
S1: funding available for other developmental issues. So my question to
S1: you is this is there a trade off between financing
S1: for climate and financing for development?
S2: Yeah. No. Thank you for this question. It's I think
S2: this question really just cuts right to the heart of
S2: the matter and right into the really where a lot
S2: of the the traffic jam is right now in a
S2: lot of ways, in terms of the reform agenda and
S2: in particular, I was making, you know, earlier this point
S2: around the fact that these organisations are demand driven organisations.
S2: So the question then becomes, well, how do you incentivise
S2: countries to want to do things differently and to borrow
S2: for different kinds of programs? But as you said, the
S2: it's hard to get countries to want to borrow for
S2: JPGs because you are basically taking out resources. Borrowing money
S2: for a project that does not necessarily generate or generally
S2: does not generate a cash flow. And for which you
S2: as a as a nation, may not be capturing the
S2: benefits of the project. And so there's a really core,
S2: really systemic change here in thinking and in models that
S2: the MDGs need to embrace if they're going to move
S2: towards this agenda. But as you also pointed out and
S2: think this is another element of real tension and negotiation
S2: and debate right now, is that the logical path towards
S2: financing more JRPGs is therefore not necessarily to finance them
S2: through loans, but to really use grants much more systematically,
S2: either to concessional loans to cheapen the terms of the
S2: loans or actually just pure grants to finance some of
S2: these projects. And then that creates a real trade off,
S2: because if you need to fundraise for grants and you're
S2: also needing to fundraise for your concessional lending windows for
S2: your for course countries, you create a trade off when
S2: a donor says, okay, well, do I give my dollar
S2: to help fight poverty in the lowest income countries? Or
S2: do I give my dollar to finance global public good
S2: that benefits everyone equally? And there's also an added element
S2: in the politics of climate change. Come in. Here is
S2: a lot of countries are saying to the rich countries
S2: at these institutions, as you're imposing this global public good
S2: agenda on us, but you, because of how you grew
S2: and how you prospered, created the global public bad that
S2: now you are using development resources to try to mitigate.
S2: And so there's there we're currently in a moment where
S2: there's a tremendous amount of debate, but also, I would
S2: say distrust within the system around, you know, the intentions
S2: of a lot of the advanced economies that are that
S2: are really pushing for these reforms of saying, you know,
S2: you're you're really using a dollars towards purposes that really
S2: aren't necessarily particularly aid related. They're very self-interested. So as
S2: a result, you know, there really isn't right now a
S2: very clear offer for how it is that these institutions
S2: will finance JRPGs. The has a small fund on its
S2: balance sheet called the fund, which was set up a
S2: couple of, I think, in 2018. And it's financed mainly
S2: through through net income. So that's the profit that the
S2: organization makes. Some of its profit goes into financing this fund.
S2: But it's it's very small. Think it's not more than
S2: 100 $100 million has gone into this. There are some
S2: proposals out there to create an entirely new window that
S2: would be completely financed, separate from the again, but by donors,
S2: and that those proposals create that new window, invite the
S2: kind of criticism that I that I presented earlier. Um,
S2: and then there are there is some interest in, in,
S2: in figuring out some other slightly more innovative quote unquote
S2: mechanisms to fund JRPGs. Um, you know, through, you know, guarantees,
S2: maybe things like debt for nature swaps. I'm again, a
S2: little bit more skeptical of the financial innovation around some
S2: of these things because I kind of, you know, you
S2: kind of have to go back to, you know, at
S2: its core, what is it? You know, it really is
S2: something where there's not a cash flow associated with it.
S2: I don't necessarily think, for instance, a solar farm in
S2: its pure sense of the terms is a global public good.
S2: I mean, that's a project that's economically viable generally with
S2: a cash flow that creates a return. I think much
S2: more of a is like telling a country, don't, you know,
S2: preserve your preserve your rainforest. Um, you know, there's not
S2: a cash flow really that's associated with that. But the
S2: benefits of us, the world having the Amazon rainforest are tremendous. Um, so,
S2: you know, think right now this is, you know, and
S2: this is why said this question is the heart of
S2: the matter is this is one of the impasses that
S2: we currently find ourselves in, on, on, on this kind
S2: of broader reform agenda around JRPGs. And, you know, it
S2: will be interesting to see where this comes out. But
S2: part of where this I don't see a successful road
S2: towards a focused MDB without much more grant resources. And
S2: I struggle with whether or not that is a politically
S2: realistic proposition in the day and age in which we are.
S1: All right. Well, just to rebound on this example of
S1: the solar farm, you mentioned that you don't necessarily see
S1: it as a global public good, but actually, don't you
S1: think it really depends on where this project is being implemented?
S1: For instance, you know, a small solar farm in the
S1: Pacific might not necessarily have a similar impact to. A
S1: large scale one in Indonesia. Indonesia is a much larger
S1: theater emitter than Fiji. So what underlies the argument that
S1: a solar farm in Indonesia isn't necessarily considered a global
S1: public good, despite its potential to significantly reduce global emissions?
S2: Yeah. Mean think think. It has components, especially if you
S2: can say the solar farm, you know, displaced a dirtier
S2: form of energy and think you can say there there
S2: are aspects that investment, but think in the purest term
S2: of the sense of what A is, I, I don't
S2: think it fully enters that box. And, and in particular,
S2: when you're thinking about this framework of, you know, grant financing,
S2: there are a lot of countries that borrow from the
S2: world Bank for solar. Let's stay with this example where
S2: these are very economically viable investments for the country. Now
S2: they have the added benefit. And this is the added
S2: benefit of renewables, of being good for the world. Right.
S2: But they are also economically. The country also reaps the
S2: economic advantage of that project and think this in a
S2: lot of ways. And this is this is, you know,
S2: you know, an interesting point you make is, is one
S2: of the approaches the bank is, is trying to take
S2: of kind of saying, you know, there aren't that many
S2: projects that in their purest, pure sense, RPGs. So let's
S2: think of ways that we can do a national project.
S2: And include a type component. So I'm going to wade
S2: into territory in which I'm not an expert. But, you know,
S2: my health colleagues would say, you know, you could think
S2: about this in the health sector of, you know, if
S2: the world Bank is doing a big health sector investment
S2: in a country to also have a component on that that's,
S2: you know, prevention focused, or maybe it's a prevention focused
S2: component that's linking into some sort of a regional prevent
S2: supervision network. And so you then have had this, this
S2: project that has strong national benefits and for which that
S2: makes absolute sense for the country to kind of finance
S2: and use its Ida allocation or its world Bank allocation
S2: to borrow from. But there's also a little layer of
S2: this project on top that has a regional or a
S2: slightly more global component, and that sits much more naturally
S2: within the world Bank MDB type model.
S1: Well. Well that's interesting. You know, at the institute, we
S1: do have some projects tracing what we call climate development
S1: finance in Southeast Asia and in the Pacific. And what
S1: we found is that sometimes what constitutes a climate adaptation
S1: and mitigation projects can actually vary from one development partners
S1: to the next. There's quite a bit of inconsistency which
S1: makes the quantification of climate development finance challenging. And so
S1: listening to you make me think that, you know, we
S1: might face the same problems with global public goods in
S1: the future. And so I really hope that standards of
S1: transparency will be improved across the board in the future.
S1: But that's that's another issue. Look, earlier you talked about
S1: the fact that the world Bank and other MDGs are
S1: demand driven. But what we've seen is that for many countries,
S1: borrowing for from MDGs can be a complex and actually
S1: resource intensive exercise which sometimes discourage borrowers. For instance, infrastructure
S1: lending can be complex to navigate. You know, MDB is
S1: applying stringent environmental and social safeguards, which, you know, play
S1: a critical role in protecting vulnerable groups and environments. But
S1: they often fail to provide the time and financial resources needed.
S1: So how can we improve the demand for MDB financing,
S1: making them more cost effective with maybe less red tape,
S1: but at the same time ensuring the high quality of
S1: those funding?
S2: Yeah. This is this is a fascinating question and I.
S2: I think you're seeing this, this play out in a
S2: lot of different contexts. A lot of countries prefer to
S2: go to China to borrow for infrastructure projects, though, that
S2: type of borrowing seems to be going down. But they're faster,
S2: less strings attached. For a country know you're operating in
S2: real time and and you you want to have a
S2: project built not in geological time, but in real, actual
S2: human time. And, you know, another another example of this is,
S2: you know, we especially, you know, during Covid saw a
S2: lot of countries going to the bond markets for emergency financing,
S2: even if, you know, spreads were, you know, 300 basis
S2: points over what they could have been getting from the
S2: world Bank. And again, it's, you know, that's just faster money.
S2: And countries seem very much it's, you know, with certain
S2: countries at certain moments in time, seem very willing to
S2: pay extra for faster money with fewer strings attached. I
S2: think this is actually a problem that is not gone unnoticed.
S2: And it was interesting. AJ Banga, who was the new
S2: president of the world Bank, was recently at the Council
S2: for Foreign Relations, which is another US based think tank.
S2: And at the end someone asked him what? What are
S2: what is your big priority for the institution? And one
S2: of the things he said is I want to fix
S2: the plumbing, which doesn't sound particularly glorious until you really
S2: actually think, you know, moving, moving things forward and faster
S2: is is in itself a really important part of development.
S2: And the organization in a lot of ways, especially, you know,
S2: especially the world Bank is under a lot of pressure
S2: to adhere to very strong safeguard standards and standards, which are,
S2: you know, obviously important and obviously kind of how part,
S2: you know, part and parcel of the model that the
S2: world Bank offers that differs from China and may make
S2: world Bank financing more sustainable than China financing over the
S2: longer term, that's a whole different podcast, but you really
S2: need to think of a way of how do you
S2: reconcile these high standards with moving, moving forward faster, because
S2: this is clearly part of what client countries are demanding
S2: from the institution. And it's and it's quite frankly, I
S2: think it's very encouraging to have a world Bank president who's,
S2: who's talking about this early on in the presidency. We'll see.
S2: You know, a lot of this, you know, is going
S2: to be very political to unlock. But, you know, there's
S2: I think this is you know, you were asking a
S2: little bit earlier about low hanging fruit. I do think
S2: there are there are elements here of that that that
S2: just can be advanced a lot faster. And I'll just
S2: say one one more thing. Um, during during the Covid crisis,
S2: a colleague and I did did a little bit of
S2: a piece of research on world Bank budget support operations
S2: and budgets. World. The MDGs basically provide two main kinds
S2: of programs. One is projects based financing and the other
S2: one is just unrestricted financing for a country's country's budget.
S2: And budget support tends to have policy conditionality. And we
S2: went through all the different budget support operations during Covid
S2: and found that operations were full of policy conditionality that
S2: had nothing to do with the Covid crisis. And that
S2: just seems like an enormous, again, missed opportunity, right? I mean,
S2: you don't you don't want to be forcing countries to
S2: do all of these complicated things in an emergency. The
S2: complicated things are for another moment in time. So again,
S2: think this, this kind of thing needs to be part
S2: of the rethink of the plumbing.
S1: Okay. Well just to rebound on this comments on on
S1: budget support. During the pandemic, we've seen a resurgence of
S1: the use of direct budget support in the Pacific as
S1: a swift way for development partners to provide emergency financing
S1: to those countries in the in the region at a
S1: time where international borders were closed and travel was restricted.
S1: And now today, most Pacific Island countries are actually facing
S1: high risk of distress, according to the IMF. Yet our
S1: analysis of early numbers show that the use of budget
S1: support is here to stay. So how do we make
S1: sure that we continue to use budget support, which actually
S1: provides quick and in the case of the Pacific, concessional financing,
S1: while also considering the debt sustainability issue in the Pacific,
S1: but also in the broader developing world.
S2: Yeah. No. And that's a very. It's very timely question to.
S2: Mean one of the things about how the world Bank
S2: and MDPs provide financing to lower income countries. And this is,
S2: I think, one of their real strengths and why they're very,
S2: very reliable partner for a lot of these countries is
S2: when these countries enter into what's called high distress. All
S2: of their loans automatically switch to grants. So the idea
S2: behind this is that the MDB should not be contributing
S2: to the country's debt distressed position. One of the weaknesses here, though,
S2: is that doesn't mean even though Ida can start providing
S2: as grants which come with a cost because grants at
S2: the end of the day do decrease the amount of
S2: volume over time that you can obtain. It doesn't necessarily
S2: mean that the country has to pursue grant financing from
S2: all of their creditors. So it creates this, this, this
S2: strange situation sometimes where a country is simultaneously getting its
S2: money from Ida in the form of grants, but also,
S2: you know, issuing Eurobond Eurobonds that, you know, 10%. And
S2: and and I do think this is this is something
S2: where there is an opportunity for, for a little bit
S2: of a rethink is, is, you know, what is what
S2: is Ida's role and not just itself being responsible lender.
S2: But have helped a bit of encouraging countries to kind of,
S2: once they've flipped into that high debt distress territory where,
S2: you know, their debt is no longer on a sustainable path.
S2: How does that also change their relationship with with the
S2: rest of the creditors? And and this isn't really fully
S2: something that has been been worked out. The institutions have,
S2: you know, both the IMF and world Bank have rules
S2: that are supposed to limit how much non-concessional debt a
S2: country can take out. They also have little carrots and
S2: sticks that can either penalize a country if it goes
S2: beyond its non-concessional lending headroom. But think these carrots and
S2: sticks in particular are actually pretty. Not not necessarily as
S2: as effective as as they could be. But, you know,
S2: in a lot of ways, I do think, you know,
S2: we are, you know, in terms of debt, really seeing
S2: a breakdown in terms of how creditors cooperate and in
S2: terms of multilateralism. And one of the things that I,
S2: you know, would really love to see amongst major creditors,
S2: especially like let's put the commercial creditors aside because this
S2: isn't going to happen, but, you know, official creditors, so
S2: multilateral and bilateral is just an agreement to follow the
S2: Ida rules. Once a country has gone into high levels
S2: of debt distress, the automatic rule is that should be
S2: triggering grants.
S1: Well, that's a great idea actually, and would definitely help
S1: making the current high debt situation in developing countries more manageable. Thanks.
S1: Thanks for sharing. Now, you mentioned China in your previous answer.
S1: And so I'd like to ask you about the impact
S1: of the US-China competition in the context of reforms. Both
S1: countries compete not only economically but also in the area
S1: of development finance. In the world Bank, for instance, the
S1: United States is the largest shareholders in China is the
S1: rising number two, but also the major borrowers and in
S1: turn the largest voice for the bank's borrowers. And so
S1: the deteriorating bilateral relationship between the United States and China
S1: poses a threat to the governance of the bank. In
S1: this context, do you think the US-China competition make makes
S1: the broader MDB reforms impossible? And if this is the case,
S1: what action should be taken by both parties to address
S1: the situation effectively?
S2: Yeah, that's that's a. That's an intense question, and I'm
S2: going to answer you very bluntly, is I think the
S2: biggest risk for a successful reform agenda is actually the
S2: state of the relationship. As you said, the bilateral relationship
S2: is not good. And in previous iterations of the relationship
S2: when it had been better. US-China cooperation were really an
S2: important motor, especially for the world Bank. And and you
S2: really saw China. Especially in the context of of Ida replenishment.
S2: China really stepping up increasingly as a more and more
S2: important source of grant financing for for a lot of
S2: the concessional windows. So so there really did seem to
S2: be on the part of a willingness. And this was
S2: this was much more prevalent under the Obama administration, a
S2: willingness to bring China into these international institutions. And then
S2: China wanted to act as a good participant in these institutions.
S2: And and that, you know, was was, I think, a
S2: really important motor for the world, frankly, that has stopped.
S2: The two countries are not seeking cooperation and coordination on
S2: on reform the way they were there. That level of
S2: partnership just does not seem to be there anymore and
S2: think that is that is a big risk for the institutions, frankly,
S2: think it's a big risk for the world. You know,
S2: I mean, we are talking about global public goods and
S2: climate change and all of these things that require collective action.
S2: And if the two largest global economies don't see eye
S2: to eye on these issues or aren't willing to cooperate
S2: on them, I just don't see how we can hope
S2: to really solve them in the swift and effective way
S2: we need to. Now, more specifically on on the world
S2: Bank side, one of the issues that I was mentioning
S2: earlier was, was funding and how important thought funding was.
S2: So the historically world Bank and this is the so
S2: that part of the world Bank that lends to middle
S2: income countries is funded through capital increases. And generally what
S2: happens is during a capital increase, there's there's a shareholder realignment.
S2: So you look at a country's shareholding and then you decide, okay,
S2: based on the World Bank's shareholding formula, or are they overweight,
S2: underweight and the latest shareholding exercise that has shown that
S2: China's China is really underweight at the world Bank, it's
S2: currently the third largest shareholder. It should be the second
S2: largest shareholder, which would allow it, which would actually allow
S2: it to overtake Japan. So there's huge there's huge geopolitical
S2: implications here. I think one of the reasons for which
S2: the US has been reluctant to pursue a capital increase
S2: negotiation in the context of this reform agenda. So it
S2: has really been reluctant to talk about financing or growing
S2: the institution through a capital increase. Is is because they're
S2: afraid of this can of worms that a shareholder realignment
S2: opens up. And I think that's I think that's frankly,
S2: you know, very unfortunate. I think it's very unfortunate for,
S2: for the institution because I do think, you know, there
S2: are a lot of different you know, we talked about
S2: the CAF reforms and we you know, there are a
S2: lot of different ways that you can grow a balance sheet.
S2: But the most tried and trusted in effective way is
S2: through capital. So, you know, and so think in a
S2: lot of ways that leaves the organization at a little
S2: bit of an impasse, because there's not unity of vision
S2: amongst China and the United States towards where these negotiations
S2: and where the reform agenda should be heading in terms
S2: of policy. But there's also a huge disunity in terms
S2: of how do you financially grow the organization. And that
S2: just unity, as I was saying, is, you know, there's
S2: a lot of geo complex geopolitical linkages there. So I,
S2: I am not optimistic on on this front.
S1: All right. Well, now I would like to talk about
S1: the billions to trillions concept. The billions to trillions concept
S1: was first introduced at the third International Conference on Financing
S1: for Development in Addis Ababa in 2015. The idea is
S1: basically that billions of multilateral finance and official development assistance
S1: should be used to mobilize trillions of private investments for
S1: climate and development. But even though AJ Banga, the new
S1: world Bank president, seems to be very enthusiastic about encouraging
S1: private capital to contribute to development, progress in that regard
S1: has been limited so far. So what are your thoughts
S1: on the potential for this to happen, and what strategies
S1: can be employed to achieve this?
S2: Yeah, the built in the billions to trillions agenda. You know,
S2: one of one of the ideas animating that was really,
S2: you know, $1. In development finance and public finance can
S2: mobilise about $10 in private finance, which is just an
S2: enormous ratio. The latest numbers that I've seen is at
S2: best we're on. We're at 1 to 1. More generally
S2: think it's about 1 to 0.7. So so the billions
S2: to trillions agenda has not has not materialised. And there
S2: isn't a lot of focus on it. It's been it's
S2: been re renamed as private capital mobilisation now. And it's
S2: very clearly a priority of of of the new world
S2: Bank president. He's created a lab focus specifically on this
S2: this issue with a lot of eminent private sector representatives.
S2: You know. I'm of two minds, frankly, on this gender.
S2: I think, you know, from a political perspective. Think the billions,
S2: trillions agenda was a little bit of a of a
S2: donor agenda saying, you know, we need all this money
S2: for the world. There are huge challenges, but we aren't
S2: really fully going to pay for it. And ergo, let's
S2: kind of create this, you know, self-fulfilling prophecy that our
S2: dollars can really stretch and bring in, bring in all
S2: of this private capital.
S3: And.
S2: And I think that in a lot of ways has
S2: done a lot of damage, because a lot of countries,
S2: you know, especially a lot of developing countries, kind of
S2: look back and say. Where is it? Where did it come?
S2: Where what? What happened? And and so, you know, think
S2: part of the let's call billions of trillions 2.0 private
S2: capital mobilization. Sorry for the acronym. Is to really think
S2: about this in the context of much more anchored targets.
S2: I think that 1 to 10 ratio is a little bit.
S2: You know, unrealistic. So let's ground this conversation in more
S2: realistic terms. So think that's that's a first start. And
S2: you know of course you know you know think there's
S2: a big actually. And this allows me to say this
S2: is think, you know, one of one of the pieces
S2: that's a little bit overlooked when you look at some
S2: of the literature that's come out around the evolution roadmap,
S2: is there's not so much discussion of the IFC and
S2: of Miga, and these are the private sector financing arms
S2: of the world Bank. But there's also an interesting question
S2: about financing instruments. We've been talking throughout this entire conversation
S2: about loans and grants, but there are other kinds of
S2: instruments that these MDGs provide, for instance, guarantees. And when
S2: you go back to the articles of agreement of, of the,
S2: for instance, the international Bank for Reconstruction and Development, they
S2: were really intended to be an institution that was mainly
S2: providing guarantees, and guarantees are much more effective at leveraging
S2: private finance than loans are. So one of the points
S2: that I'm really making is that, you know, if you
S2: really want to kind of focus on, you know, getting
S2: more private capital in, it really does require changing a
S2: lot of the instrument mix that these institutions are using.
S2: And I really do think move a little bit more
S2: towards guarantee financing through guarantees could be a very appealing
S2: one for a lot of the different client countries of
S2: the bank. The second thing, though, that I will say is,
S2: you know, one of the other really big shifts that
S2: we've had over over the past several years is, you know,
S2: we're now in a very high interest rate global environment.
S2: And I do wonder, it was, you know, during a
S2: time of benign interest rates when investors were starving for
S2: yield and really looking for investments in emerging markets and
S2: low income countries, you know, and this was a time
S2: when interest rates were low. Now there's a whole change
S2: in kind of global risk appetite with interest rates going up.
S2: And it really that search for yield changes. Investors can
S2: stay you know in advanced economies and get that yield.
S2: You know that really can change a lot of the
S2: equation to around around the billions of trillions agenda and
S2: around private capital mobilization. And if we couldn't do it
S2: in a benign interest rate environment, the higher interest rate environment,
S2: I think, also makes it that much more complicated. And
S2: just one more point on this. This is also an
S2: interesting conversation because it does link back to some of
S2: the conversation that we were talking had, were having earlier
S2: around global public goods. And in particular, you know, if
S2: you want to use your concessional financing or your grant
S2: financing to bring in private capital, is that the best
S2: use of your money? Is it is it really on
S2: private sector investments, or is it on the public sector side? And,
S2: you know, a lot of a lot of criticism of
S2: the billions of trillions, it's you're using a lot of
S2: development finance to de-risk and ultimately subsidize private sector, taking
S2: a lot of the putting a lot of the risk
S2: on the public sector, but not the upside and putting,
S2: you know, really de-risking the private sector. So so this
S2: is this is really turned into quite a complicated, ferocious
S2: debate in a lot of ways and can say it's
S2: in particular, we do not have a unified view on this.
S2: And this is one of the topics in development finance
S2: where we are often internally most most in disagreement.
S1: All right. Well, look, I hope this, this Lowy Institute
S1: podcast will not contribute to additional disagreement at committee. I
S1: have two last questions for you. For the first one,
S1: I would like to take a step back and look
S1: at the MDB reforms overall. Do you think the current
S1: reforms go far enough, and if not, what else needs
S1: to be done?
S2: Look, I mean, as it as it stands right now,
S2: I don't think that the institutions have done enough. I
S2: don't think shareholders have done enough. I think there's this
S2: is this is a little bit more of a marathon
S2: than a sprint. And and again, you know, I really
S2: do repeat myself here, but I really think part of
S2: this is I think these institutions need to be a
S2: lot bigger. I think these are this is the global
S2: safety net. We need a bigger global safety net. And
S2: there was a lot of. Speed bumps to growing these.
S2: These organizations and think until there's there's an agreement on
S2: on what big or how to get these organizations bigger.
S2: We're going to be at an impasse around the reform agenda.
S2: And that makes me very, very concerned.
S1: Okay. Well, that's actually a very good segment to my
S1: last question. So in this podcast, we'd like to conclude
S1: by asking our guests for their big ideas on the
S1: topic that we've covered in the show. I would like
S1: to ask you this. What is your big ideas for
S1: reshaping the multilateral development banks and making them more efficient
S1: and better tailored for tackling global challenges in supporting sustainable development?
S2: Well, you know, think we've touched on all aspects of
S2: this in a lot of ways. So I'm going to
S2: give you a slightly provocative answer. I mean, think, you know,
S2: faster institutions, bigger institutions, more agile institutions, institutions that can
S2: finance different kinds of projects, but that are also still
S2: focused on the poorest of the poor and really on development.
S2: I think we need all of that. And I think
S2: there's there's right now, because of the year of focus,
S2: we are not at a time where there's a dearth
S2: of good ideas. I don't think that there's ever been
S2: so much written about the multilateral development banks than there
S2: has in the past years, whether it's by the institutions,
S2: by by the governments that are shareholders, by, you know,
S2: think tanks, some think tanks. So my wish for the
S2: world is I think and and and this is you know,
S2: this is inspired by, by a suggestion of a former colleague,
S2: you know, was kind of making slyly on Twitter is
S2: I think we need an international moratorium for a year
S2: on all of these high level global convenings and think
S2: we need to start getting some work done. This year
S2: has been frenetic, uh, traveling from capital to capital. When
S2: you look at the declarations and the statements that are
S2: coming out of these summits, they are very mushy. They
S2: are both promising the world and promising the moon and
S2: promising the universe without really anything concrete behind them. And
S2: I think it's time to start talking a little bit
S2: less and doing a little bit more, because we are
S2: really inhabiting this time where we have some very lofty
S2: rhetoric out there and not a huge amount to show
S2: for it. So I would like us all to get
S2: to work.
S1: Yeah, well, that's actually a great idea. And you could
S1: also argue that such a moratorium would also drastically reduce
S1: the carbon footprint of NDB. So overall, it'd be very
S1: good for the planet.
S2: There are there are many good externalities that could come
S2: from this. We can start by doing it for six
S2: months and then see how that goes.
S1: Well, this is all what we have time for today, Clémence.
S1: Merci book. We thank you very much for sharing your
S1: thoughts on those topics. This this was really fascinating.
S2: My pleasure. This was a wonderful conversation.
S1: You've been listening to Development Features, a podcast from the
S1: Indo-Pacific Development Center at the Lowy Institute, hosted by institute
S1: experts and produced by my colleague Josh Goodwin. Development futures
S1: is part of the Lowy Institute Podcast Network. Find all
S1: our podcast series on our website. Lowe institute.org/publications. Thanks for listening.