Less than a year ago, former MasterCard CEO Ajay Banga was chosen in a surprise move to head the World Bank. Putting a Wall Street player addicted to profits in charge of a development institution that claims to help lift poor countries out of underdevelopment seemed inappropriate.
Because many view the bank as an institution with a disappointing record and a management structure that is not fit to meet the development challenges of the current era, the required selection is to select a person with a clear interest in the social purpose.
Mr. Banga's appointment was also disappointing. But if reports of a quiet set of spring meetings between the Bank and the Fund in mid-April are to be believed, less than a year later, Banga has begun to transform the landscape of global development finance. However, we can take a closer look at what Panja was able to push across the points in a different direction. His agenda appears to include three elements.
First, the move to increase funds available to the Bank through country contributions and guarantees, ostensibly to expand grants, concessional and trade financing, to address old (sustainable development goals) and new (climate/green) challenges.
Since this is a period in which overall development financing from rich countries is being reduced, this implies an increase in the Bank's share and influence in the field of development and climate finance.
Second, “reform” to increase the bank’s flexibility and respond to demands that require it to exploit its own resources to mobilize additional funds and provide larger amounts of financing. Since this must be done without harming the bank's AAA rating, support in the form of sovereign guarantees and pooling of resources mobilized and risks borne by regional development banks is seen as critical to achieving this goal.
Third, attempts to refocus the Bank as an entity through innovative, hybrid or hybrid financing will incentivize private investors to shift a significant share of assets under their management to projects linked to the Sustainable Development Goals and those that facilitate mitigation and adaptation. The justification for this is that the scale of the financing challenge is too large even for the expanded resource base of multilateral banks to support it.
As Banga puts it: “The reality is that government money and multilateral bank money alone are not going to reach those trillions of dollars. . . . That's why the private sector is really important.
Despite the hype, progress at the Spring Meetings, held in a critical year for advancing climate finance commitments, was marginal in all of these areas. The commitment of rich countries, which was reported in the media, was a contribution of $11 billion from 11 rich countries to the new financing mechanisms by the Bank.
One is a portfolio guarantee platform, which the bank claims provides a “shared approach to risk”, meaning that contributions from “donors” are leveraged to borrow additional money, perhaps at a lower cost, to finance socially relevant projects. The other is a hybrid capital instrument that provides shareholders and partners with a channel to invest in bonds with “special leverage potential.”
The third is the “Livable Planet” Fund, which targets governments and charities to mobilize funds to address common challenges such as epidemic prevention and preparedness. In all these cases, the exact nature and effectiveness of this mechanism remains unclear, and the total resources that can be mobilized in the amount of $11 billion promised so far is only about $70 billion.
The other major “achievement” being touted is the announcement by ten different institutions – regional multilateral development banks and the World Bank – of their intention to establish global cofinancing arrangements. Under this arrangement, they will exchange information on project pipelines and co-financing opportunities that facilitate decision-making on co-financing, as well as exchange ideas on best practices. This is expected to facilitate efficiency and transparency in co-financing.
The real issues on the financing front are already known. Development financing must be significantly strengthened, especially the mandatory annual contributions that will be made under the new collective quantitative climate finance target currently being negotiated. Much of this additional financing should be concessional flows through existing channels such as the Green Climate Fund, the Adaptation Fund, and the recently established Loss and Damage Facility.
Finally, Banga's contribution so far has been minimal – a decision, supported by a G20 committee report, to reduce the bank's equity-to-loan ratio from 20 to 19 percent, which is expected to free up an additional $4 billion annually.
Take it all together, and it's hard to comprehend the hype surrounding Panja and the transformative impact it is having on the bank. But the noise is easy to explain. Banga was selected for the position he holds by the US government, which reserved the right to determine the leadership of the bank. But the US government cannot make this choice alone; it must acquiesce to the demands of powerful economic interests.
The most powerful of these forces today is globalized American finance, whose representatives are working to subordinate the huge sums that governments are urged to allocate to finance development to profit.
The aim is to shift a greater share of so-called development aid into forms of financing, identified as “innovative instruments”, in which the private sector shares or captures all profits, while risks and losses are borne by multilateral development. Banks using public resources. This is the agenda that the President of the World Bank was chosen to implement. Which explains the hype around Panga.
The writer is a professor of economics and head of the Research and Policy Department at IDEAs.