Inside Story

Banking on Banga 

The new World Bank president wants change, but will he get the backing he needs?

Michael Jacobs Washington 18 April 2023 1529 words

Reform in the air: a protester wearing an Ajay Banga mask outside the World Bank headquarters in Washington on the final day of last week’s spring meetings. Kevin Wolf/AP Images

Rarely has an American nominee for president of the World Bank received as warm a welcome at their first public appearances as Ajay Banga had during the World Bank–IMF spring meetings in Washington last week. And this was not just because the unseasonal heat was a foretaste of the climate change to which Banga insists the bank must respond. The former chief executive of Mastercard hasn’t yet been formally chosen for the post — that will happen next month — but he has already been creating quite an impression.

Admittedly, he would barely have had to open his mouth to be seen as an improvement on his predecessor, Trump appointee David Malpass. Never popular, Malpass made something of an ass of himself last September when he appeared to deny the existence of global warming. He lasted just five more months before resigning, a year before the end of his term.

The system under which the United States appoints the president of the World Bank while Europe gets to choose the president of the International Monetary Fund is routinely denounced by developing countries. It is a postcolonial carve-up without justification in the modern age, except for the fact that the United States and European countries are the two organisations’ largest shareholders.

Banga’s positive reception can be put down to two factors: he is a genuine financier with a solid strategic and managerial record at Mastercard, and he grew up in India, where he is still regarded as one of their own. He spoke last week at a number of public and private events on the fringe of the spring meetings of the bank and the IMF. His audiences included finance ministers from well over a hundred countries, along with businesspeople, academics and representatives of NGOs, philanthropists and the financial media.

To wander among the packed fringe meetings in Washington, as I did, was to be given an education in global development policy, with topics ranging from renewable energy to emerging market currency risk, humanitarian assistance to climate-resilient agriculture, low-income country indebtedness to girls’ education. In these fields and others, the World Bank spends around US$100 billion annually via a combination of commercial loans to middle-income countries, low-interest loans to poorer countries, and grants.

The bank is the largest in the network of “multinational development banks,” or MDBs, that lends resources from developed to developing nations: the others include the Inter-American Development Bank, the African Development Bank, the Asian Development Bank and the much more recently established Asian Infrastructure Investment Bank, in which China is the major shareholder.

Banga is arriving just as reform of this system is in the air. Last year US Treasury secretary Janet Yellen called on the bank to prepare a “roadmap” for change, with the aim of clarifying its mission and streamlining its procedures. As a draft of the roadmap was published in advance of the spring meetings, other voices sought to widen the agenda further. On a state visit to China, French president Emmanuel Macron called for a “new global financial pact” to revise “the financial terms of international solidarity, whether it concerns debt issue or mobilisation of the World Bank and IMF, to address both inequalities and the consequences of climate change.” He confirmed that Paris would host a summit in June to pursue these issues.

Three principal problems underlie calls for reform of the World Bank and MDB system. The first relates to changing conditions since the institutions were designed in the decades after the end of the second world war to help the developing world out of poverty. This remains their core mission, but in recent years new challenges have become increasingly pressing.

As resource depletion and habitat destruction gathered pace, the banks were forced to redefine themselves as champions not merely of economic growth but of “green growth.” As continuing income and gender inequalities disfigured many countries’ development records, “inclusive growth” became the mantra. Now, accelerating climate change not only threatens to overwhelm past growth but also demands a new form of development altogether, one that is both resilient to rising temperatures, and decarbonised.

It was Malpass’s inability to grasp these challenges that eventually did for him. But the necessary reorientation of the World Bank won’t be straightforward. The poorest countries know how damaging climate change is for them, but they warn that a greater focus on tackling carbon emissions will inevitably reduce funding for education, health and other traditional anti-poverty measures. Backed by India and China, they insist that any broadening of the bank’s remit must be accompanied by an expansion of its lending resources. Developed countries, however, are not minded to provide new funds — at least until they can see reform under way.

Second, the World Bank’s operating procedures have been widely criticised. Determined to protect the triple-A credit rating that allows it to borrow at the same interest rates as Western governments, the bank follows highly risk-averse lending policies. In many countries it competes with private banks to lend to commercially safe projects, leading commentators to question its added value. In an early reform agreed to in Washington, the bank will now be able to lend out more funds relative to its shareholder capital. But this will yield only an extra US$4 billion annually.

Meanwhile the bank’s own operating procedures are notoriously slow and cumbersome. Forced by its developed-country shareholders and NGOs to apply stringent environmental and human rights safeguards, and still using paper-based processes, the bank can often take two years to reach a decision on a lending application. As one African leader observed at a fringe event, “If I want a new road, I can be driving on the one that China builds us before the bank has put it to their committee.”

Third, the MDBs are being urged to mobilise far more private-sector lending. In a world in which developing countries need to invest an estimated US$2.4 trillion annually in green infrastructure, sustainable agriculture, nature conservation and climate resilience, the funds at the banks’ own disposal are not nearly sufficient. But getting the private sector to invest at scale in emerging markets other than China has proved difficult.

Even in stable economies like India, the interest rate charged on borrowings is twice as high as in a rich-world country; in Africa it can often be a multiple of three. New, more innovative approaches are thus being urged on the banks, involving greater use of risk-sharing instruments such as government guarantees and insurance mechanisms to protect against exchange rate fluctuations.

Can the World Bank and its sister institutions respond to these demands? The latest version of the bank’s reform roadmap was widely criticised in Washington as too limited and incremental. But blame-shifting was also rife: country shareholders pin the weak draft on unimaginative management; the latter say privately that it is the shareholders who have watered down their much bolder initial proposals.

Ajay Banga thus faces both great expectations and tough challenges. He has been clear about his own priorities. Integrating climate change into everything the bank does will be one of them; mobilising private sector cash another. And he warns he will be forthright whenever the real problem is not the bank’s bureaucracy but the unwillingness of its country shareholders to agree to something new.

The elephant in the room is the make-up of the shareholders themselves. As in any bank, voting rights reflect equity. Since the last set of reforms in 2010, China has been the third-largest shareholder in the bank’s main arm, after the United States and Japan. With other emerging and developing economies it now has 47 per cent of total shares. If, as seems likely, the bank receives another injection of capital next year consequent on reform and an expansion in its remit, that figure could rise to more than 50 per cent. But the United States and its Western allies will be loath to allow China the possibility of amassing a majority voting coalition.

In this context June’s Paris Summit promises to be pivotal. Working closely with Barbados prime minister Mia Mottley, originator of the ambitious “Bridgetown Initiative” for global financial reform, and Indian prime minister Narendra Modi, chair of this year’s G20, Macron has set out an ambitious agenda for world leaders.

Focused on expanding global financial flows for development, climate and environmental protection, the summit will make World Bank and MDB reform one of several priorities. Others will be a review of the system under which developing countries fall into, and might escape, unsustainable debt; new funding streams for climate “loss and damage,” such as an international levy on carbon emissions from shipping; and the reallocation of Special Drawing Rights, the reserve currency issued by the International Monetary Fund, to poverty-reduction programs. If the “3M” leaders — Macron, Modi and Mottley — succeed, each of these issues will be taken forward to detailed decisions next year.

For his part, Ajay Banga has made clear that he is up for the idea of a “new global financial pact” along these lines. He may be their nominee, but the question is whether the United States and its Western allies are up for it too.