0:05

Hello and welcome to Development Futures, a podcast

0:07

brought to you by the Indo-Pacific Development Center

0:10

here at the Lowy Institute. My

0:12

name is Alexander Dayan, the deputy director

0:14

of the center, and I am your host for this episode.

0:17

In this podcast, our researchers

0:20

and some of the world's leading experts discuss fresh

0:22

policy insights and ideas on the

0:24

most pressing development issues in the world today.

0:28

In this episode, we will be talking about

0:30

the future of the multilateral development banks,

0:32

often referred to as the MDGs.

0:38

More than a year ago, the MDGs embarked on

0:40

an ambitious reform agenda for them to tackle

0:43

the pressing dual challenge of climate change

0:45

and development. Items on

0:47

the agenda involve improving MDB governance

0:49

structures, objectives and targets,

0:51

and creating new financial instruments

0:54

to mobilise public and private capital

0:56

for climate and development investments. And

0:59

this week, finance ministers and other officials

1:01

from around the world are in Marrakesh for

1:03

the world Bank and IMF annual meetings,

1:06

where a lot of attention is put on the

1:08

reform efforts in the work. So

1:10

to discuss those, I am joined by Clemens Landers,

1:13

a senior policy fellow at the center for Global

1:15

Development who focuses on multilateral development

1:17

banks and sustainable development finance.

1:21

Clemens previously worked at the US

1:23

Treasury on US engagement with the NBS

1:25

and also at the world Bank. So she's

1:27

basically one of the best persons to discuss those issues.

1:31

I had the pleasure of meeting Clemens a few

1:33

months ago, when my colleague, Roland Rajan and I

1:35

presented our work on development finance

1:37

at CGD in Washington. And

1:39

since that time, we've had the idea of having her

1:41

as a guest on our new podcast. And

1:44

I'm thrilled that this has finally become a reality.

1:46

So, Clemens, thank you very much

1:48

for taking the time to have a chat today.

1:50

Well, thank you, Alexander, and I'm so pleased to

1:52

be here.

1:52

First, I would like to look at the big picture

1:55

and ask you the following questions. What

1:57

do we mean when we talk about

1:59

MDB reforms generally? I

2:01

mean, what are the primary topics of discussion

2:03

concerning those reforms and

2:05

in the context of the world Bank, IMF

2:08

annual meeting is happening as we speak.

2:10

What do you think is being discussed precisely

2:12

on that specific topic?

2:14

Yeah. Well, you're right to point out

2:16

that there's been a really strong

2:18

spotlight on the MDGs

2:21

since for the past year and the world

2:23

Bank in particular about

2:25

a year ago, actually, Secretary

2:27

Janet Yellen, the US Treasury secretary, made

2:29

a speech around what is

2:31

now called MDB evolution,

2:34

really focused on the fact that it was time

2:36

for for some major changes

2:39

within the system, with a particular focus

2:41

on the world Bank. And she made she

2:43

made the speech about a year ago at the center for Global Development.

2:46

And this is really created an

2:49

enormous amount of momentum, an enormous

2:51

amount of political momentum around

2:53

around reform. And there's been

2:55

especially a lot of a lot of focus on the

2:57

world Bank, which is which has been

3:00

in a lot of ways accelerated by the fact

3:02

that the world Bank also has a new, new president,

3:04

AJ Banga. Um,

3:07

so so what is meant and what what

3:09

really drove drove

3:13

the US Treasury secretary to,

3:15

to start this whole process,

3:17

I think was, was, was was

3:19

really several things. Um, one,

3:22

of course, was the

3:24

Covid crisis really radically changed

3:27

the global economic landscape. Um,

3:30

we really saw a lot of countries

3:33

really struggling to

3:35

access capital markets

3:38

and external financing. And the MDGs

3:41

were really seen to be the

3:44

global safety net. But

3:46

their their response to Covid

3:48

was was uneven. There's there's

3:50

there's quite a bit of literature out there

3:52

and including from from the center for Global

3:55

Development just around you know,

3:57

some for some countries,

3:59

you know, disbursements, you know, weren't moving

4:01

particularly fast. The

4:03

institution for some countries was

4:05

very good on the crisis response and for others

4:07

was less good. And

4:10

there's also a sense that that that the

4:12

world Bank in particular slightly

4:14

missed the boat on things like Covax,

4:16

which was a multilateral funding

4:18

for for vaccinations and simply

4:21

because its own internal rules and procedures

4:24

were too complicated for, for, for

4:26

to participate. And it eventually actually did end

4:28

up participating. But but

4:30

just this feeling that that

4:33

the world Bank really wasn't equipped for the challenges

4:35

of the day, and if it was kind of missing the boat

4:37

on the Covid crisis, what did that

4:39

really say about the World Bank's response

4:41

to the climate crisis, which in a lot of ways

4:43

is like a slower, slower brewing

4:46

Covid crisis, but equally as as existential

4:48

in its nature? Um, and

4:51

against that backdrop, there

4:53

was also a lot of political changes afoot.

4:55

Notably, you know, I've mentioned the United

4:57

States quite a bit. You can see maybe a little bit of my

4:59

Washington bias as I, as I sit here.

5:02

But, you know, there were big changes in the US

5:05

political landscape with

5:07

with the election of Joe Biden and

5:09

really, really sharp turn

5:12

on in terms of foreign policy and economic

5:14

policy priorities. And notably,

5:16

you had you had an administration

5:19

that was that was after the Trump administration

5:21

that was coming in that really wanted to signal

5:24

that it was multilateral,

5:26

um, that that it was

5:29

focused on international issues

5:31

like foreign assistance and that

5:33

it was also going to embrace the climate

5:35

agenda. And so in a lot

5:37

of ways, this really

5:39

created a in a lot of ways, the stars

5:42

were aligned for really big focus and

5:44

a really big rethink of

5:46

of the world Bank and

5:49

the other MDGs by association.

5:52

So what is what is what is kind

5:54

of the meat? Meat on the bones here.

5:57

You know, think it's a couple of different things,

5:59

but in a lot of ways think, you know, you can

6:01

this, this, this evolution. And we can talk

6:03

about it a little bit further means

6:05

a lot of different things to a lot of different shareholders.

6:07

And there's not necessarily complete

6:10

agreement amongst shareholders

6:13

on on where the evolution and

6:15

reform agenda should be, should be headed.

6:17

But think a couple of areas where there

6:19

is broad consensus and think

6:21

this is the easiest and the hardest is

6:24

the system is too small. The to

6:26

the extent that the system is,

6:28

is the global safety net and needs

6:30

to be the source and should be the

6:32

source of a lot of public global investment.

6:36

These together, institutions that are

6:38

together providing 100, $200

6:40

billion a year in financing.

6:42

And that really is a drop bucket in the bucket compared

6:45

to the climate and development challenges

6:48

that a lot of low and middle

6:50

income countries face. So

6:53

that's that's one piece. The second piece

6:55

is really thinking about how the

6:57

these institutions can be more flexible

7:01

and in particular,

7:03

more readily

7:05

to readily engaged on

7:07

climate finance issues. And

7:10

that kind of points to one of the complexities

7:12

in these institutions models is that they're really demand

7:15

driven institutions. It's not

7:17

that the world Bank goes to a country and says,

7:19

we want to invest in this project

7:21

to the contrary, and this is really the

7:24

kind of heart and soul of what

7:26

distinguishes an MDB from a bilateral

7:28

aid agency, for instance, is is it really

7:30

is the country that originates the project and

7:33

says, this is what we want to borrow for.

7:35

So if there's this, this increasing realization

7:37

that we live in a world where there

7:39

are all these existential threats,

7:41

you really want to think about how you're incentivizing

7:44

countries to borrow to

7:47

mitigate these existential threats,

7:49

whether that's climate pandemic,

7:53

you know, fragility, you

7:56

know, kind of what's been put under this rubric

7:58

of, of global public goods. And then

8:00

the third piece, you know, and think this

8:02

is getting a little bit less of a focus,

8:04

but think remains incredibly important,

8:06

is there is this unfinished business of

8:08

development there?

8:11

You know, we are nowhere out of the woods

8:13

in terms of, you know, eradicating

8:15

poverty, you know, think, you

8:17

know, a couple of weeks ago, we had the Unga

8:21

in New York. It was very clear how

8:23

off track the international community

8:25

is on pretty much every single

8:27

SDG. So just

8:29

as you're reinventing new missions for

8:31

these institutions, you also have

8:34

to ensure that they're staying in the course

8:36

on their on their original ones. So,

8:39

you know, that's a lot. So

8:42

what is getting discussed in Marrakesh.

8:45

And I really do want to emphasize

8:47

think Marrakesh is really kind of the

8:50

beginning and not the end point. One

8:52

is, you know, these, again, are

8:55

meetings that are particularly focused on the world Bank and

8:57

not the broader system. One

8:59

is that shareholders

9:01

in the institution have endorsed

9:03

a larger perspective

9:06

on what the World Bank's mission is. So

9:08

after many, many months

9:10

of wordsmithing, they've

9:13

decided to add the bank's

9:15

original mandate. And the mandate is

9:17

the twin goals of of eradicating

9:19

poverty and boosting shared prosperity. They've

9:21

they've they've agreed to add to a livable

9:24

planet. So finance ministers

9:26

who are shareholders in the institution are going to be

9:28

formally endorsing

9:30

this new mandate. So that's

9:32

the big ticket item. But

9:35

for many think that that simply isn't

9:37

isn't going to be enough. It's it's the opening

9:39

salvo in a reform process. But

9:41

but a new mandate is in

9:44

and of itself, not a reform

9:46

agenda.

9:48

Okay, well, putting aside this new mandate,

9:50

then what do you view as the low

9:52

hanging fruit of the reform

9:54

agenda? I mean, what

9:56

changes to the development banks do you think

9:59

will be the simplest to implement with the

10:01

highest impact?

10:02

Well, think maybe maybe kind

10:04

of going back to the financing side. I mean, think

10:06

one of one of the lower

10:09

hanging fruit is

10:11

the fact that there was recently

10:14

a report on this

10:16

is going to sound very dry. So listeners,

10:18

bear with me because I'll make this fun. But

10:21

there was recently a report called the The

10:24

Calf Report, which, which

10:26

reviewed the capital adequacy frameworks

10:28

of these institutions. And it basically

10:30

found that most

10:32

multilateral development banks manage their finances

10:34

very conservatively. And

10:37

because they manage their finances so conservatively,

10:39

they're potentially holding back a lot

10:41

of development finance. So

10:44

one of the the interesting

10:46

perspective that the authors of this report

10:48

took was there were a few small changes that

10:51

these banks can make, changing

10:53

how they provision for loans,

10:55

changing what's known as their equity to loan

10:58

ratios, changing how

11:00

they view something called callable capital, which I promise

11:02

I won't get into. But

11:05

a couple of things like this, actually

11:07

not a couple of pretty sturdy list

11:09

of things could be enough to really unlock

11:12

quite a bit of financing. And so

11:14

in a lot of ways, you

11:16

know, this calf review and a lot of these

11:18

findings are very

11:21

easy ways of really increasing

11:23

the amount of headroom that

11:25

the multilateral development banks can be,

11:28

then providing as loans to their client countries

11:30

without necessarily having to go

11:33

to shareholders to ask for more

11:35

cash. The bigger difficulties

11:37

in this reform agenda is everyone wants

11:39

the institutions to do more and to change.

11:42

But as you know, you know very well

11:44

and everyone in the development finance space

11:46

knows very well this is not a particularly

11:50

this is not a particularly glorious time

11:52

for general the generosity

11:55

of bilateral donors to especially

11:57

to multilateral institutions. So,

11:59

so this, this, this capital adequacy review is

12:01

kind of the way it's often described as the bank is,

12:04

is a way of squeezing a little bit more out of the

12:06

lemon and, and think in a lot

12:08

of ways the institutions really have

12:10

embraced these mean for some it's been a

12:12

little bit too slow to embrace these reforms,

12:14

but they have embraced these reforms and have

12:16

put forward some pretty, you know, not

12:18

enormous but good consequential

12:21

new headroom numbers.

12:24

I think the world Bank put

12:26

out said that, that by implementing some

12:28

of these reforms that could generate an extra 100 billion over

12:30

the next ten years. So

12:32

some, some pretty good ambitious numbers

12:36

linked to the agenda. So,

12:39

you know, and so hopefully that's something that,

12:41

you know, the the momentum on on that

12:43

side will continue.

12:44

Well very good. Now I would like to

12:46

talk to you about the global public goods

12:48

or the JRPGs that you mentioned earlier.

12:51

So for our listeners, global

12:53

public goods are goods and resources that benefit

12:56

everyone. They are non excludable

12:58

so no one can be excluded from using them.

13:00

And they are non rivalrous, meaning

13:02

that using them doesn't actually reduce their availability

13:05

to others. Example of

13:07

JRPGs include climate change mitigation,

13:09

communicable disease prevention and global

13:11

peace and security. Um,

13:14

and the global public goods are, in my mind,

13:16

at the centre of the MDB reform agenda,

13:19

as the MDGs are under pressure to

13:21

expand and adapt to address global needs,

13:23

including through the provision of those global

13:25

public goods. Now,

13:28

the problem is that for some developing countries,

13:31

borrowing for GPG programs

13:33

at the domestic level can be challenging

13:35

due to fiscal constraints, for instance,

13:37

or different national priorities.

13:40

And so to make these loans more appealing

13:42

to these countries. Institutions

13:44

like the world Bank may need to actually sweeten

13:47

the deal, often involving subsidies,

13:49

which translates into increased

13:52

grant funding. But given the

13:54

limited budget of organisations like

13:56

the world Bank and other MDGs, allocating

13:58

more grants for climate

14:00

and similar global public goods could actually

14:03

result in reduced grant

14:05

funding available for other developmental

14:07

issues. So my question

14:10

to you is this is there a trade

14:12

off between financing for climate

14:14

and financing for development?

14:17

Yeah. No. Thank you for this question. It's I

14:19

think this question really just cuts right

14:21

to the heart of the matter and right into the really

14:24

where a lot of the the traffic

14:26

jam is right now in a lot of ways, in terms of

14:29

the reform agenda and in particular,

14:31

I was making, you know, earlier this point around

14:33

the fact that these organisations

14:35

are demand driven organisations.

14:38

So the question then becomes, well, how

14:40

do you incentivise countries to want

14:42

to do things differently

14:44

and to borrow for different kinds of programs? But

14:46

as you said, the

14:49

it's hard to get countries to want to borrow

14:51

for JPGs because you are basically

14:55

taking out resources. Borrowing

14:58

money for a project that

15:00

does not necessarily generate or

15:02

generally does not generate a cash flow.

15:05

And for which you as a as

15:07

a nation, may not be capturing the benefits

15:10

of the project. And so there's a

15:12

really core, really systemic

15:15

change here in

15:17

thinking and in models that the

15:19

MDGs need to embrace if they're

15:21

going to move towards this agenda. But

15:23

as you also pointed out and

15:26

think this is another element of real

15:28

tension and negotiation and debate right

15:30

now, is that the

15:32

logical path towards financing

15:35

more JRPGs is therefore not

15:37

necessarily to finance them through loans,

15:40

but to really use grants

15:42

much more systematically,

15:45

either to concessional loans

15:47

to cheapen the terms of the loans or actually

15:49

just pure grants to finance some

15:52

of these projects. And then that

15:54

creates a real

15:56

trade off, because if

15:58

you need to fundraise for grants

16:01

and you're also needing to fundraise for your

16:03

concessional lending windows for your for course

16:06

countries, you create a trade

16:08

off when a donor says, okay, well, do I give

16:10

my dollar to help fight poverty

16:12

in the lowest income countries? Or do I give

16:14

my dollar to

16:16

finance global

16:19

public good that

16:21

benefits everyone equally? And

16:24

there's also an added element in the politics

16:26

of climate change. Come in. Here is a lot

16:28

of countries are saying to the rich countries

16:31

at these institutions, as you're imposing

16:33

this global public good agenda

16:36

on us, but you,

16:38

because of how you grew and how you prospered,

16:40

created the global public bad

16:43

that now you are using development resources

16:46

to try to mitigate. And so

16:48

there's there we're currently

16:50

in a moment where there's a tremendous

16:52

amount of debate,

16:54

but also, I would say distrust

16:58

within the system around, you know,

17:00

the intentions of a lot of the

17:03

advanced economies that are that are really pushing

17:05

for these reforms of saying, you know, you're

17:07

you're really using a dollars towards

17:09

purposes that really aren't necessarily

17:11

particularly aid related. They're very self-interested.

17:15

So as a result, you know, there really

17:17

isn't right now a

17:19

very clear offer for

17:22

how it is that these institutions

17:24

will finance JRPGs. The

17:28

has a small fund on its balance

17:30

sheet called the fund, which was set

17:32

up a couple of, I think, in 2018.

17:35

And it's financed mainly through

17:37

through net income. So that's the profit

17:40

that the organization makes. Some of its

17:42

profit goes into financing this fund. But

17:44

it's it's very small. Think it's not

17:46

more than 100 $100 million has

17:48

gone into this. There

17:50

are some proposals out there to create

17:52

an entirely new window

17:56

that would be completely

17:58

financed, separate from the again,

18:01

but by donors, and

18:04

that those proposals create that new window,

18:06

invite the kind of criticism that I that

18:08

I presented earlier. Um,

18:10

and then there are there is some interest

18:12

in, in, in figuring

18:15

out some other slightly more innovative

18:17

quote unquote mechanisms to fund

18:19

JRPGs. Um,

18:22

you know, through, you know, guarantees,

18:25

maybe things like debt for nature swaps. I'm again,

18:27

a little bit more skeptical of the financial

18:29

innovation around some of

18:31

these things because I kind of, you know,

18:33

you kind of have to go back to, you know, at its

18:35

core, what is it? You know, it really

18:38

is something where there's not a cash flow associated

18:40

with it. I don't necessarily

18:42

think, for instance, a solar farm in its

18:45

pure sense of the terms is a global public good.

18:47

I mean, that's a project that's economically

18:49

viable generally with a cash flow

18:51

that creates a return. I

18:54

think much more of a is like telling

18:56

a country, don't, you know, preserve

18:58

your preserve your rainforest.

19:00

Um, you know, there's not a cash

19:02

flow really that's associated with that. But the

19:04

benefits of us, the world having

19:06

the Amazon rainforest are tremendous.

19:09

Um, so,

19:12

you know, think right now this is,

19:14

you know, and this is why said this question is the heart of the matter

19:16

is this is one of the impasses that we currently

19:18

find ourselves in, on,

19:21

on, on this kind of broader reform agenda

19:23

around JRPGs. And, you know, it will

19:25

be interesting to see where

19:27

this comes out. But part of where

19:30

this I don't see a

19:32

successful road towards

19:35

a focused MDB

19:37

without much more grant

19:39

resources. And I struggle with

19:42

whether or not that is a politically realistic

19:44

proposition in the day and age in which we are.

19:46

All right. Well, just to rebound on this example

19:49

of the solar farm, you

19:51

mentioned that you don't necessarily see it as a global

19:53

public good, but actually, don't you think it

19:55

really depends on where this project

19:57

is being implemented? For

20:00

instance, you know, a small solar farm

20:02

in the Pacific might not necessarily have

20:04

a similar impact to. A large scale one in

20:06

Indonesia. Indonesia is

20:08

a much larger theater emitter than Fiji.

20:10

So what underlies the

20:12

argument that a solar farm in Indonesia isn't

20:14

necessarily considered a global

20:16

public good, despite its potential to

20:18

significantly reduce global emissions?

20:21

Yeah. Mean think think. It has components,

20:24

especially if you can say the solar farm,

20:27

you know, displaced a

20:29

dirtier form of energy

20:32

and think you can say there there

20:34

are aspects that investment,

20:36

but think in the purest term

20:38

of the sense of what A is,

20:41

I, I don't

20:44

think it fully enters that box. And,

20:46

and in particular, when you're thinking about

20:48

this framework of, you know,

20:50

grant financing, there are a lot of countries

20:53

that borrow from the world Bank

20:55

for solar. Let's stay with

20:57

this example where

20:59

these are very economically viable

21:02

investments for the country. Now

21:04

they have the added benefit. And this is the

21:06

added benefit of renewables, of

21:08

being good for the world. Right.

21:11

But they are also

21:13

economically. The

21:16

country also reaps the economic

21:18

advantage of that project

21:20

and think this in a lot of ways. And this is

21:22

this is, you know, you know, an interesting

21:25

point you make is, is one of the approaches

21:27

the bank is, is trying to take of kind

21:29

of saying, you know, there aren't that many

21:32

projects that in their

21:34

purest, pure sense,

21:36

RPGs. So let's

21:38

think of ways that we can do a national

21:41

project. And

21:43

include a type

21:45

component. So I'm going to wade into territory

21:48

in which I'm not an expert. But, you

21:50

know, my health colleagues would say,

21:52

you know, you could think about this in the health

21:54

sector of, you know, if the world Bank is doing

21:57

a big health sector investment

21:59

in a country to

22:01

also have a component on that that's,

22:04

you know, prevention focused, or

22:06

maybe it's a prevention focused component that's

22:09

linking into some sort of a regional

22:11

prevent supervision network.

22:13

And so you then have had this,

22:15

this project that has strong national

22:17

benefits and

22:19

for which that makes absolute sense for the country

22:22

to kind of finance and use its Ida allocation

22:24

or its world Bank allocation to borrow from.

22:27

But there's also a little layer of

22:29

this project on top that

22:31

has a regional or

22:33

a slightly more global component,

22:35

and that sits

22:38

much more naturally

22:41

within the world Bank

22:43

MDB type model.

22:46

Well. Well that's interesting. You

22:48

know, at the institute, we do have some projects tracing

22:50

what we call climate development finance in Southeast

22:52

Asia and in the Pacific. And what

22:55

we found is that sometimes what constitutes

22:57

a climate adaptation and mitigation projects can

22:59

actually vary from one development partners

23:01

to the next. There's quite a bit of

23:03

inconsistency which makes the quantification

23:06

of climate development finance challenging. And

23:09

so listening to you make me think that, you know, we might

23:11

face the same problems with global

23:13

public goods in the future. And so I

23:15

really hope that standards of transparency will be improved

23:18

across the board in the future. But that's

23:20

that's another issue. Look,

23:23

earlier you talked about the fact that the

23:25

world Bank and other MDGs are

23:27

demand driven. But

23:29

what we've seen is that for many countries, borrowing

23:32

for from MDGs can be a complex

23:34

and actually resource intensive exercise which

23:36

sometimes discourage borrowers. For

23:39

instance, infrastructure lending can be complex

23:41

to navigate. You know, MDB is applying stringent

23:43

environmental and social safeguards, which,

23:46

you know, play a critical role

23:48

in protecting vulnerable groups and

23:50

environments. But they often fail to provide

23:53

the time and financial resources

23:55

needed. So how can

23:57

we improve the demand for MDB

23:59

financing, making them more cost effective

24:01

with maybe less red tape, but at the same

24:03

time ensuring the high quality

24:06

of those funding?

24:08

Yeah. This is this is a fascinating question

24:10

and I. I think you're

24:12

seeing this, this play out in

24:15

a lot of different contexts. A

24:18

lot of countries prefer to go to

24:20

China to borrow for infrastructure

24:23

projects, though, that

24:25

type of borrowing seems to be going down.

24:27

But they're

24:29

faster, less strings attached.

24:32

For a country know you're operating in real

24:34

time and and you you

24:36

want to have a project built not

24:39

in geological time, but in real, actual

24:42

human time. And,

24:44

you know, another another example

24:46

of this is, you know, we especially,

24:49

you know, during Covid saw a lot of countries

24:52

going to the bond markets for

24:54

emergency financing, even if, you

24:56

know, spreads were, you know, 300

24:59

basis points over what they could have been getting

25:01

from the world Bank. And again,

25:03

it's, you know, that's just faster money. And

25:05

countries seem very much it's,

25:07

you know, with certain countries at certain moments in

25:09

time, seem very willing to pay extra

25:12

for faster money with fewer strings

25:14

attached. I think this is actually

25:17

a problem that is not gone unnoticed.

25:20

And it was interesting. AJ Banga,

25:22

who was the new president of the world Bank, was

25:25

recently at the Council for Foreign

25:27

Relations, which is another US based

25:29

think tank. And at the end

25:31

someone asked him what? What are what is

25:33

your big priority for the institution? And one of

25:35

the things he said is I want to fix the plumbing, which

25:38

doesn't sound particularly glorious

25:40

until you really actually think, you

25:42

know, moving, moving things forward

25:45

and faster is is in itself

25:48

a really important part of

25:50

development. And

25:53

the organization in a lot of ways,

25:55

especially, you know, especially the world Bank

25:57

is under a lot of pressure to adhere to very

26:00

strong safeguard standards

26:02

and standards, which

26:04

are, you know, obviously important and obviously

26:07

kind of how part, you know, part and parcel

26:09

of the model that the world Bank

26:11

offers that differs from

26:13

China and may make world Bank financing

26:16

more sustainable than China financing over the longer

26:18

term, that's a whole different podcast,

26:20

but you really need to

26:22

think of a way of how do you reconcile these high

26:25

standards with moving, moving

26:27

forward faster, because this is clearly

26:29

part of what client countries

26:31

are demanding from the institution.

26:33

And it's and it's quite frankly, I think it's very

26:36

encouraging to have a world Bank president who's,

26:38

who's talking about this early

26:40

on in the presidency. We'll

26:43

see. You know, a lot of this, you know,

26:45

is going to be very political to unlock.

26:48

But, you know, there's I think

26:50

this is you know, you were asking a little bit earlier about

26:53

low hanging fruit. I do think there are there are elements

26:55

here of that that that just can

26:57

be advanced a lot faster. And I'll

26:59

just say one one more thing. Um,

27:03

during during the Covid crisis,

27:06

a colleague and I did did a little

27:08

bit of a piece of research on world

27:10

Bank budget support operations and budgets. World.

27:12

The MDGs basically provide two

27:15

main kinds of programs.

27:17

One is projects based

27:19

financing and the other one is just unrestricted

27:21

financing for a country's country's

27:24

budget. And budget support tends

27:26

to have policy conditionality. And

27:28

we went through all the different budget support operations

27:31

during Covid and found

27:33

that operations were full of policy conditionality

27:35

that had nothing to do with the Covid crisis.

27:38

And that just seems like

27:40

an enormous, again, missed opportunity,

27:42

right? I mean, you don't you don't

27:44

want to be forcing

27:48

countries to do all of these complicated

27:50

things in an emergency.

27:53

The complicated things are for another moment in

27:55

time. So again,

27:58

think this, this kind of thing needs to be part of

28:00

the rethink of the plumbing.

28:03

Okay. Well just to rebound on this comments

28:05

on on budget support. During

28:07

the pandemic, we've seen a resurgence of the use

28:09

of direct budget support in the Pacific

28:12

as a swift way for development partners

28:14

to provide emergency financing to those

28:16

countries in the in the region

28:18

at a time where international borders were closed

28:20

and travel was restricted. And

28:22

now today, most Pacific Island countries

28:25

are actually facing high risk of distress, according

28:27

to the IMF. Yet

28:29

our analysis of early numbers show that the

28:31

use of budget support is here to stay. So how

28:33

do we make sure that we continue to use budget

28:35

support, which actually provides

28:37

quick and in the case of the Pacific,

28:39

concessional financing, while

28:41

also considering the debt sustainability issue

28:43

in the Pacific, but also in the broader developing

28:46

world.

28:47

Yeah. No. And that's a very. It's

28:51

very timely question to. Mean one

28:53

of the things about how

28:55

the world Bank and MDPs provide financing

28:57

to lower income countries. And

29:00

this is, I think, one of their real

29:02

strengths and why they're very,

29:06

very reliable partner for a

29:08

lot of these countries is when these countries enter

29:10

into what's called high distress. All

29:14

of their loans automatically switch

29:16

to grants. So the

29:18

idea behind this is that

29:20

the MDB should not be

29:22

contributing to the country's

29:25

debt distressed position. One

29:28

of the weaknesses here, though,

29:30

is that doesn't mean

29:32

even though Ida

29:34

can start providing as grants

29:37

which come with a cost because

29:39

grants at the end of the day do decrease

29:41

the amount of volume over time that you can obtain.

29:44

It doesn't necessarily mean that the country

29:46

has to pursue grant financing

29:48

from all of their creditors.

29:51

So it creates this, this, this

29:54

strange situation sometimes

29:56

where a country is simultaneously

29:58

getting its money from Ida in the form of

30:00

grants, but also, you know, issuing

30:03

Eurobond Eurobonds

30:05

that, you know, 10%. And

30:07

and and I do think this is this

30:10

is something where there is an opportunity

30:12

for, for a little bit of a rethink

30:14

is, is, you know, what is what

30:16

is Ida's role and not just itself

30:19

being responsible lender. But

30:22

have helped a bit of encouraging

30:24

countries to kind of, once they've

30:26

flipped into that high debt distress

30:28

territory where, you know, their

30:31

debt is no longer on a sustainable

30:33

path. How does that also

30:36

change their relationship with with the rest

30:38

of the creditors? And and this isn't really

30:40

fully something that has been

30:43

been worked out. The institutions

30:45

have, you know, both the IMF and world Bank

30:47

have rules that are supposed to limit

30:49

how much non-concessional debt a country can

30:51

take out. They also

30:54

have little carrots and sticks that

30:56

can either penalize a country if it goes beyond

30:59

its non-concessional lending headroom. But

31:01

think these carrots and sticks in particular

31:04

are actually pretty. Not

31:07

not necessarily as as effective

31:09

as as they could be. But,

31:12

you know, in a lot of ways, I do think,

31:14

you know, we

31:17

are, you know, in terms of debt, really seeing a breakdown

31:20

in terms of how creditors cooperate

31:22

and in terms of multilateralism. And one of the things

31:24

that I, you know, would really

31:27

love to see amongst major

31:29

creditors, especially like let's

31:31

put the commercial creditors aside because this isn't going to happen,

31:33

but, you know, official creditors, so multilateral

31:36

and bilateral is just an agreement

31:38

to follow the Ida rules.

31:40

Once a country has gone into high levels of debt distress,

31:43

the automatic rule is that should be triggering

31:45

grants.

31:46

Well, that's a great idea actually, and

31:48

would definitely help making the current high debt

31:50

situation in developing countries more manageable.

31:53

Thanks. Thanks for sharing. Now,

31:56

you mentioned China in your previous answer.

31:58

And so I'd like to ask you about the

32:00

impact of the US-China competition in

32:02

the context of reforms. Both

32:05

countries compete not only economically but also

32:07

in the area of development finance.

32:10

In the world Bank, for instance, the United

32:12

States is the largest shareholders

32:14

in China is the rising number two, but

32:16

also the major borrowers and in turn

32:18

the largest voice for the bank's borrowers.

32:22

And so the deteriorating bilateral

32:24

relationship between the United States and China

32:26

poses a threat to the governance of the

32:28

bank. In this context,

32:30

do you think the US-China competition

32:33

make makes the

32:35

broader MDB reforms impossible?

32:38

And if this is the case, what action

32:40

should be taken by both parties to address

32:42

the situation effectively?

32:44

Yeah, that's that's a. That's

32:47

an intense question, and I'm going to answer

32:49

you very bluntly, is I think the biggest risk

32:52

for a successful reform

32:55

agenda is actually the state of

32:57

the relationship. As you

32:59

said, the bilateral relationship is not good.

33:02

And in previous

33:04

iterations of the relationship

33:08

when it had been better. US-China

33:11

cooperation were really an important

33:13

motor, especially for the world

33:15

Bank. And and you really

33:17

saw China.

33:21

Especially in the context of of

33:23

Ida replenishment. China really stepping

33:26

up increasingly as

33:28

a more and more important source

33:30

of grant financing for

33:33

for a lot of the concessional windows. So

33:35

so there really did seem to

33:37

be on the part of a willingness.

33:39

And this was this was much more

33:41

prevalent under the Obama administration, a willingness

33:44

to bring China into these international

33:47

institutions. And then China

33:49

wanted to act as a good participant

33:52

in these institutions. And

33:54

and that, you know, was was,

33:56

I think, a really important motor for the world,

33:58

frankly, that has

34:00

stopped. The two countries

34:02

are not seeking cooperation

34:05

and coordination on on reform

34:07

the way they were there. That

34:10

level of partnership just

34:12

does not seem to be there anymore and

34:14

think that is that is a

34:17

big risk for the institutions, frankly, think it's a big

34:19

risk for the world. You know, I mean, we

34:21

are talking about global public goods and climate change

34:23

and all of these things that require collective action.

34:25

And if the two largest global economies

34:28

don't see eye to eye on

34:30

these issues or aren't willing to cooperate

34:32

on them, I just don't see how we can

34:34

hope to really solve them in the

34:36

swift and effective way we need to.

34:39

Now, more specifically

34:41

on on the world Bank side, one

34:44

of the issues that I was mentioning earlier was,

34:46

was funding and how important

34:48

thought funding was. So

34:51

the historically world Bank and

34:53

this is the so that part of the world Bank

34:55

that lends to middle income countries

34:57

is funded through capital increases. And

35:00

generally what happens is during a capital increase,

35:02

there's there's a shareholder realignment. So

35:04

you look at a country's shareholding and then

35:06

you decide, okay, based on the

35:08

World Bank's shareholding formula, or are they overweight,

35:10

underweight and the

35:13

latest shareholding exercise that has shown

35:15

that China's China is really underweight

35:17

at the world Bank, it's currently the

35:19

third largest shareholder. It should be the second largest

35:22

shareholder, which would allow it, which would actually

35:24

allow it to overtake Japan. So

35:26

there's huge there's huge geopolitical

35:28

implications here. I

35:30

think one of the reasons for which

35:33

the US has been reluctant to pursue a

35:35

capital increase negotiation in

35:38

the context of this reform agenda. So

35:40

it has really been reluctant to talk

35:42

about financing or

35:44

growing the institution through a capital increase.

35:47

Is is because they're afraid of

35:49

this can of worms that a shareholder

35:52

realignment opens up. And

35:54

I think that's I think that's frankly,

35:57

you know, very unfortunate. I think it's very

35:59

unfortunate for, for the institution

36:01

because I do think, you know, there are a lot of

36:04

different you know, we talked about the CAF reforms and

36:06

we you know, there are a lot of different ways that you

36:08

can grow a balance sheet. But the most tried

36:10

and trusted in effective way is

36:13

through capital. So,

36:15

you know, and so think in a lot of ways that

36:17

leaves the organization at a little bit

36:19

of an impasse, because there's not

36:21

unity of vision amongst China and

36:23

the United States towards where these

36:26

negotiations and where the reform agenda

36:28

should be heading in terms of policy.

36:30

But there's also a huge disunity

36:33

in terms of how do you financially

36:36

grow the organization. And

36:38

that just unity, as I was saying, is, you

36:40

know, there's a lot of geo complex

36:43

geopolitical linkages there. So

36:45

I, I am not

36:47

optimistic on on this front.

36:50

All right. Well, now I would like to

36:52

talk about the billions to trillions concept.

36:54

The billions to trillions concept was first

36:57

introduced at the third International Conference

36:59

on Financing for Development in Addis Ababa

37:01

in 2015. The idea is

37:03

basically that billions of multilateral finance

37:05

and official development assistance should be used

37:07

to mobilize trillions of private investments

37:10

for climate and development. But

37:12

even though AJ Banga, the new

37:14

world Bank president, seems to be very

37:16

enthusiastic about encouraging private capital

37:18

to contribute to development, progress

37:21

in that regard has been limited so far.

37:24

So what are your thoughts on the potential

37:26

for this to happen, and what strategies

37:28

can be employed to achieve this?

37:31

Yeah, the built in the billions to trillions

37:33

agenda. You know, one of one of

37:35

the ideas animating that was really, you know,

37:37

$1. In

37:40

development finance and public finance

37:42

can mobilise about $10 in private

37:44

finance, which is just

37:47

an enormous ratio. The

37:50

latest numbers that I've seen is at best

37:52

we're on. We're at 1 to 1. More

37:55

generally think it's about 1 to 0.7.

37:58

So so the billions to trillions agenda

38:00

has not has not materialised.

38:03

And there isn't a lot of focus on it.

38:05

It's been it's been re renamed

38:07

as private capital mobilisation now.

38:10

And it's very clearly a priority

38:12

of of of the new world Bank president.

38:15

He's created a lab focus

38:18

specifically on this this issue with a lot of

38:21

eminent private sector representatives.

38:24

You know. I'm

38:27

of two minds, frankly, on this gender.

38:30

I think, you know, from a political perspective.

38:32

Think the billions, trillions agenda was a

38:34

little bit of a of a donor

38:36

agenda saying, you know, we need all

38:38

this money for the world.

38:40

There are huge challenges, but we

38:43

aren't really fully going to pay for

38:45

it. And ergo, let's

38:47

kind of create this,

38:49

you know, self-fulfilling prophecy

38:51

that our dollars can really stretch

38:54

and bring in, bring in all of this private

38:56

capital.

38:58

And.

39:00

And I think that in a lot of ways has done

39:02

a lot of damage, because a lot of

39:04

countries, you know, especially a lot of developing

39:06

countries, kind of look back and say. Where

39:09

is it? Where did it come? Where what? What

39:11

happened? And and

39:13

so, you know, think part of the

39:16

let's call billions of trillions

39:18

2.0 private capital mobilization.

39:20

Sorry for the acronym. Is

39:22

to really think about this in the context of much

39:24

more anchored targets.

39:27

I think that 1 to 10 ratio

39:30

is a little bit. You

39:33

know, unrealistic. So

39:35

let's ground this conversation in

39:37

more realistic terms. So

39:39

think that's that's a first start. And

39:42

you know of course you know

39:44

you know think there's a big actually. And

39:46

this allows me to say this is think, you know, one

39:48

of one of the pieces that's a little bit overlooked

39:50

when you look at some of the literature that's

39:52

come out around the evolution roadmap, is there's

39:54

not so much discussion of the IFC and

39:57

of Miga, and these are the private sector

39:59

financing arms of the world Bank.

40:02

But there's also an interesting question

40:04

about financing instruments. We've

40:07

been talking throughout this entire conversation about

40:09

loans and grants, but there

40:11

are other kinds of instruments that these MDGs

40:13

provide, for instance, guarantees.

40:15

And when you go back to the articles of

40:18

agreement of,

40:20

of the, for

40:22

instance, the international Bank for Reconstruction and Development,

40:25

they were really intended to be

40:27

an institution that was mainly providing guarantees,

40:30

and guarantees are much

40:32

more effective at leveraging

40:35

private finance than loans are.

40:37

So one of the points

40:39

that I'm really making is that, you know, if you

40:41

really want to kind of focus on,

40:44

you know, getting more

40:46

private capital in, it really does

40:48

require changing a lot of the instrument mix

40:50

that these institutions are using. And

40:53

I really do think move

40:55

a little bit more towards guarantee financing

40:57

through guarantees could

40:59

be a very appealing one for a lot of the different

41:02

client countries of the bank. The

41:04

second thing, though, that I will say

41:06

is, you know, one

41:08

of the other really big shifts that we've had

41:10

over over the past several

41:13

years is, you know, we're

41:16

now in a very high interest rate global environment.

41:19

And I do wonder,

41:21

it was, you know, during a time

41:24

of benign interest rates when investors were

41:26

starving for yield and really looking

41:28

for investments in emerging markets

41:30

and low income countries, you know,

41:32

and this was a time when interest rates were low. Now

41:34

there's a whole change

41:36

in kind of global risk appetite with interest

41:38

rates going up. And it really that search for yield

41:40

changes. Investors can stay

41:43

you know in advanced economies and get that

41:45

yield. You know that really can

41:47

change a lot of the equation to around

41:49

around the billions of trillions agenda

41:51

and around private capital mobilization. And if we

41:53

couldn't do it in a benign interest rate environment,

41:56

the higher interest rate environment, I think,

41:58

also makes it that much

42:00

more complicated. And just one more point

42:02

on this. This is also

42:04

an interesting conversation because it does link

42:07

back to some of the conversation

42:09

that we were talking had, were having earlier around

42:11

global public goods. And in particular,

42:14

you know, if you want to use

42:16

your concessional financing or your grant financing

42:19

to bring in private capital, is that

42:21

the best use of your money?

42:24

Is it is it really on private sector investments,

42:27

or is it on the public sector side? And,

42:29

you know, a lot of a lot of criticism

42:31

of the billions of trillions, it's you're using

42:33

a lot of development finance to de-risk and ultimately

42:36

subsidize private sector,

42:38

taking a lot of the putting a lot of the

42:40

risk on the public sector, but

42:43

not the upside and putting, you know,

42:45

really de-risking the private sector. So

42:47

so this is this is really turned into

42:49

quite a complicated, ferocious

42:52

debate in a lot of ways and can say it's

42:55

in particular, we do not have a unified

42:57

view on this. And this is one of the topics in development

42:59

finance where we are

43:01

often internally most most in disagreement.

43:04

All right. Well, look, I hope this, this

43:06

Lowy Institute podcast will not contribute

43:08

to additional disagreement at committee. I

43:11

have two last questions for you. For

43:13

the first one, I would like to take a step back

43:15

and look at the MDB reforms overall.

43:18

Do you think the current reforms go far

43:20

enough, and if not, what else needs to

43:22

be done?

43:23

Look, I mean, as it as it stands right now,

43:26

I don't think that the

43:28

institutions have done enough.

43:30

I don't think shareholders have done enough. I think

43:32

there's this is this is a little

43:34

bit more of a marathon than a sprint.

43:37

And and again, you know,

43:39

I really do repeat myself here, but

43:41

I really think part of this is I

43:43

think these institutions need to be a lot bigger.

43:46

I think these are this is the global safety

43:48

net. We need a bigger global safety net.

43:51

And there was a lot of. Speed

43:55

bumps to growing these. These organizations

43:57

and think until there's there's an agreement

43:59

on on what big or how to get

44:01

these organizations bigger. We're going to be at

44:03

an impasse around

44:05

the reform agenda. And that makes me very,

44:07

very concerned.

44:09

Okay. Well, that's actually a very good segment to my last

44:11

question. So in this podcast,

44:13

we'd like to conclude by asking our

44:15

guests for their big ideas on the topic

44:17

that we've covered in the show. I would like

44:19

to ask you this. What is your big ideas

44:22

for reshaping the multilateral development banks

44:24

and making them more efficient and better tailored for

44:26

tackling global challenges in supporting sustainable

44:28

development?

44:29

Well, you know, think we've touched on all

44:31

aspects of this in a lot of ways. So I'm going

44:33

to give you a slightly provocative answer.

44:37

I mean, think, you know, faster

44:40

institutions, bigger institutions,

44:42

more agile institutions, institutions

44:44

that can finance different kinds

44:47

of projects, but that are also still

44:49

focused on the poorest of the poor

44:51

and really on development.

44:54

I think we need all of that. And I think there's there's

44:56

right now, because

44:58

of the year of focus, we

45:00

are not at a time where there's a dearth of

45:02

good ideas. I don't think that

45:04

there's ever been so much written about the multilateral

45:07

development banks than there has in the past years, whether it's

45:09

by the institutions, by by

45:11

the governments that are shareholders,

45:13

by, you

45:15

know, think tanks, some think tanks.

45:19

So my wish for the world

45:21

is I think and

45:23

and and this is you know,

45:26

this is inspired by, by a suggestion

45:28

of a former colleague, you know, was kind of

45:30

making slyly on Twitter

45:32

is I think we need an international moratorium

45:35

for a year on all of these high

45:37

level global convenings

45:39

and think we need to start getting

45:41

some work done. This

45:44

year has been frenetic,

45:46

uh, traveling from

45:49

capital to capital. When

45:51

you look at the declarations and

45:53

the statements that are coming out of these summits,

45:55

they are very mushy. They

45:58

are both promising the world and promising

46:00

the moon and promising the universe

46:02

without really anything

46:05

concrete behind them.

46:07

And I think it's time to start

46:10

talking a little bit less and

46:12

doing a little bit more, because

46:14

we are really inhabiting this time

46:16

where we have some very lofty rhetoric

46:18

out there and not a huge

46:21

amount to show for it. So

46:23

I would like us all to

46:26

get to work.

46:28

Yeah, well, that's actually a great idea. And you

46:30

could also argue that such a moratorium would

46:32

also drastically reduce the carbon footprint of

46:34

NDB. So overall, it'd be very good for the planet.

46:37

There are there are many good externalities

46:39

that could come from this. We can start by

46:41

doing it for six months and then see how that

46:43

goes.

46:44

Well, this is all what we have time for today,

46:46

Clémence. Merci book. We thank you very much

46:48

for sharing your thoughts on those topics.

46:50

This this was really fascinating.

46:52

My pleasure. This was a wonderful conversation.

46:54

You've been listening to Development Features, a

46:56

podcast from the Indo-Pacific Development Center

46:58

at the Lowy Institute, hosted by institute

47:01

experts and produced by my colleague Josh Goodwin.

47:03

Development futures is part of the Lowy Institute

47:05

Podcast Network. Find all

47:07

our podcast series on our website.

47:10

Lowe institute.org/publications.

47:14

Thanks for listening.