There is much to cheer about in last week’s announcement by the World Bank’s shareholders to increase its paid-in capital by $13 billion. It is a healthy signal that multilateralism is alive and well, at least in the development space. And on a practical level it is sufficient to ensure that at a minimum World Bank lending to sovereign borrowers can be sustained at current levels, and private sector operations can continue to grow.
That’s the big money to do more of what the World Bank has been doing for decades.
And then there is some new “little money”—up to $100 million—for the World Bank to do something different. The little money is designated for global public goods (GPGs). Compared to the $10 billion a year goal recommended in this 2016 CGD report of a high-level panel, $100 million is tiny. But it is an important breakthrough.
Why is a mere $100 million a breakthrough?
First, this $100 million will come from net income or profit of the bank on its lending to middle-income countries, as recommended in the above report, not from a donor-funded trust fund (the biggest being the Climate Investment Funds financed by donors at the World Bank and the major regional banks). It reflects a “collective” decision agreed among all the Bank’s shareholders, including middle- and low-income countries, to spend “collective” money for the collective or common good at the global level. It builds on the practice for the last 15 years in which shareholders periodically agreed to modest transfers of net income from the World Bank’s hard (IBRD) window to help finance highly concessional loans to the poorest countries from the Bank’s soft or concessional (IDA) window. Though middle-income borrowers were never enthusiastic about these transfers, which they saw reasonably enough as indirectly raising their cost of borrowing all other things the same (by “spending” retained earnings), they accepted them as appropriate (and small relative to rich country direct contributions to IDA) given the Bank’s character as a kind of credit cooperative dedicated to reducing global poverty.
The decision to transfer income opens the door to continued and increasing annual transfers for a set of GPGs critical to the development and poverty mission of the World Bank (and other MDBs)—climate, pandemic risk, food security, tax information sharing, agriculture, more. And by establishing the principle of a GPG window, it could, over the next decade, inspire contributions, including of capital, and including from middle-income countries who are already “donors” (e.g., from China, Brazil) and want to take advantage of leveraging their contributions through World Bank operations.
That in turn could be tied to a special governance structure in which major contributors have votes as well as voice on priorities and policies—in short this century’s IDA-type response to this century’s new global challenges.
Second, at the start and given its small size, the $100 million will be used (presumably) not only or mostly as outright grants but to reduce the cost of borrowing for middle-income countries willing to borrow for projects and programs that generate some benefits beyond their own borders. In that sense it addresses the key constraint the MDBs face to greater, long-term involvement in financing and promoting GPGs. That constraint is the bank’s business model itself—built for decades on loans to countries (or private players) – loans and other operations that generate the profit or net income that makes responsible banking a sustainable business. The constraint is real: borrowing governments naturally put a priority on investments that capture all the benefits of new investments internally, at the domestic level. The “concessional” $100 million can be used to encourage borrowing for projects and programs with global as well as national benefits (so-called “co-benefits”). It does so by increasing further the subsidy World Bank IBRD loans already provide relative to the market. Good examples of country investments with global development co-benefits include renewable energy that is otherwise not least-cost (e.g., in coal-rich India and South Africa given that carbon emissions are underpriced); mass transit with its huge upfront costs but long-term global benefits in reduced reliance on cars; disease surveillance and reporting systems that are critical to prevent pandemics; and applied agricultural research.
But is this really new? The Global Concessional Financing Fund (GCFF) story
The idea of subsidizing IBRD loans using grant resources (or “concessional” money in World Bank-speak) is not in itself new. But it’s been hiding in plain sight for many years—and unlike the $100 million—has been built ad hoc trust fund arrangements set up at the behest of traditional bilateral donors.
The donor-funded Climate Investment Funds at the multilateral development banks are a good example. One of these, the Clean Technology Fund at the World Bank has reduced the total cost of borrowing for renewable power in North Africa, for example, by combining IBRD lending with a CTF grant. Like several of the other almost 1000 trust funds at the World Bank, many of which provide outright grants to support the Bank’s own staff time and travel, the CIFs enable donors to leverage the MDBs’ comparative advantage as financial institutions: the fiduciary, legal, and technical infrastructure that supports policy dialogue and lending at the borrowing country level.
But because these and other special funds rely on donor largesse, their half-life is perpetually in question (the CIFs have not received new donor pledges since 2008). For how long will any particular donor or set of donors be willing or able to renew contributions to these special—what I have elsewhere called ad hoc—funds?
The creation of a new “facility” or trust fund-like window at the World Bank in late 2016 may turn out in retrospect to be critical to the $100 million breakthrough story.
The Global Concessional Financing Facility is a creature of the massive flows of migrants out of Syria in 2015. Its financing, again provided by the traditional donors, is being used to reduce the cost of IBRD loans to Jordan, Lebanon—and potentially other middle-income countries—willing to develop programs and policies that provide services and open up job markets to refugees living within their borders. The United States, several European countries and other bilateral donors have so far made over $350 million in pledges and contributions, of which $200 million has been committed, leveraging $1 billion in total loan commitments to Jordan and Lebanon.
Refugees, like climate and pandemics, represent a collective action challenge for sovereign nations; the war in Syria created a more highly visible challenge with more obvious and immediate political repercussions for high-income countries than climate change or even the Ebola tragedy of 2014- 2015. The GCFF has created new momentum for collective financing of 21st century development challenges behind the straightforward idea of leveraging the technical and other assets of the World Bank by subsidizing traditional country loans.
But in the case of the GCFF, the shortcoming of a donor-reliant window (in this case reliant on repeated rounds—every six months—of donor pledging meetings followed by repeated “begging bowl” reminders from Bank staff to fulfill those pledges) is more visible and more problematic. It is problematic because the refugee challenge is poorly met by only or mostly a short-term “humanitarian” response. It almost always requires addressing long-term “development” challenges—from provision of effective social services to rethinking job markets and labor market policies. The GCFF’s supporters and countries like Jordan and Lebanon want the GCFF to provide support for refugees that goes well beyond humanitarian flows, if refugees are, as Minister Fakhoury of Jordan said at a recent CGD event, to be seen by host countries as a development asset not a burden.
Another breakthrough: differential pricing
Another breakthrough in the recapitalization agreement is the introduction of differential or flexible pricing of IBRD loans. But what has that got to do with the $100 million?
The shareholders have agreed to increase borrowing costs for upper-middle income countries that are approaching graduation from Bank borrowing. In this case the idea is to reduce the subsidy relative to the market that upper middle-income countries otherwise enjoy. (Differential loan pricing that is income-based rather credit-based is also recommended in the 2016 CGD report, [p. 16 and p. 24].) On this issue, the United States was particularly eager to see China reduce its borrowing, and to quote my colleague Scott Morris, negotiated “good incentives over polarizing fiats” (for background go here and here). In addition to adding marginally to net income, higher borrowing costs encourage voluntary graduation.
Differential pricing that is income-based and higher for some borrowers also normalizes the idea of differential pricing that is lower for some programs and projects—those with global co-benefits—and the logic of a GPG window to finance the cost, as does the GCFF, of the World Bank and the other multilateral banks of creating that incentive.
Putting it all together
Voila: A breakthrough. Collective financing of “grant” money at $100 billion, growing awareness of the potential to encourage borrowing with co-benefits, and flexible pricing that invites reasonable subsidies for global public goods.