World Bank president selection: ‘Gentleman’s agreement’ alive and well

After the unexpected resignation of World Bank President Jim Yong Kim in January, the selection of his successor was subject to considerable scrutiny. Over 150 civil society organisations, academics and other individuals calledon the Board to live up to its commitment following Kim’s departure to an open, transparent and merit-based process. The call was echoed by the demands outlined in a January letter by the Bank’s own staff association. These demands are not new and resonate with long-standing calls to end the so-called ‘gentleman’s agreement’, which ensures that the IMF managing director is a European and the World Bank president a US national. They also reflect the calls made as far back as 2012, not by civil society activists or ‘disgruntled’ governments from the Global South, but by senior Bank staff. Former Chief Economist Joseph Stiglitz and Senior Vice-Presidents François Bourguignon and Nicholas Stern argued in a 2012 Financial Times article that the process is “not only hypocritical, it also destroys the trust and spirit of collaboration needed to manage the profound problems facing the world.”

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The future direction: where does Malpass stand?

There are big questions in development finance that the new World Bank President will need to answer. There is a big question about what direction David Malpass will take at the World Bank. Will civil society be pushing the Bank to answer these questions in a positive way? Here are just a few things on the agenda:

  1. How should the World Bank engage with the rise of new creditors and funders in the system – particularly Chinese banks?
  2. Without being a “self-service shop” for investors – what is the vision for the Bank’s role vis-a-vis private finance? It’s easy to say don’t privatize health and education sectors, but what about beyond those easy platitudes? What is the role for the IFC that accords with a sensible vision for a multilateral bank that is now supposed to be supporting sustainable development, rather than what an aid agency should do?
  3. Given worries about debt crises building in developing countries, how should the next World Bank president manage lending to countries increasingly heading towards debt distress but in desperate need of investments to hit their Sustainable Development Goal (SDG) targets?
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A Malpass presidency, a win-win for China?

Many have focused on how David Malpass will implement the directives coming out of the Trump administration in Washington. In particular that means viewing international affairs, including international economic affairs, as a zero-sum game. And the principle target of the Trump administration has been China.

But what will a Malpass presidency really mean for China after all? Much like the discussion of the trade war, when the US places indiscriminate tariffs on Chinese goods, while this may hurt Chinese exporters, the ones who really pay for the tariffs are American consumers. A Malpass-led World Bank attempted assault on China might end up hurting the US more than China. Let’s look at some of the most relevant areas:

Belt and Road Initiative (BRI) projects – the presumption is that a Malpass-led World Bank will steer clear of BRI projects, in line with Trump administration views that there should be less financial cooperation with China. But BRI projects are again not generally capital constrained. There are plenty of other lenders lined up to work in conjunction with BRI projects, particularly the Chinese policy banks – behemoths with much bigger balance sheets than the World Bank. There are also other development finance institutions and regional development banks ready to cooperate. In the end the World Bank will be side lined in many important infrastructure and economic development projects, reducing its scope for influence as countries increase their cooperation with, and possibly reliance on, other financial institutions. Malpass thus looks like a gift to the Asian Infrastructure Investment Bank, the BRICS New Development Bank (NDB) and the Chinese policy banks, who will all gain influence while the influence of the World Bank declines.

Energy sector – the denials of the Trump administration and their republican backers have zero impact on the reality of climate change. In the meantime there is a global race to develop leadership in low-carbon technologies and industries. A World Bank that eschews clean energy projects in favour of coal financing, oil exploration or other high carbon projects, will leave the way clear for others in this space. World Bank financed clean energy projects could certainly use Chinese technology, as the Bank-mandated procurement frameworks would have been fairly open, level playing fields. Non-World Bank projects, especially those financed under BRI (see above) are free to tie financing to certain procurement choices. This leaves Chinese wind turbine, hydropower and solar conglomerates well placed to use Chinese financial muscle to help them drive down the marginal cost of their offering with learning-by-doing approaches. A World Bank change of heart on clean energy is not likely to actually reduce the demand for these technologies, so the Chinese will be aiming to develop dominant market shares for their companies. That’s a win for Chinese industrial policy.

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Open letter from civil society to the WBG Board: Make commitment to climate action a prerequisite for next WBG Prez

NB: The below text is from a letter submitted by 31 civil society organisations to the World Bank’s Board of Executive Directors on 14 March. A PDF version of this letter is available here.

Dear World Bank Group Executive Directors,

We write to call upon you to prioritise the Bank’s role in combating climate change in the selection of the next World Bank Group president.

We feel strongly that the appointment of the World Bank’s next president will greatly affect, positively or negatively, the Bank’s implementation of its commitments to take effective climate action, and to bring its lending and technical support into alignment with the Paris Climate Agreement.

As you well know, climate change poses an existential threat to societies around the world. A landmark IPCC report released in 2018 lays bare the scale of the challenge: Global CO2 emissions must be reduced by 45 per cent by 2030 compared to 2010 levels to keep global average temperature rise at 1.5°C compared to preindustrial levels.

As the climate crisis continues to bite, many of the Bank’s borrower countries will be among the most severely impacted. The Bank’s own research shows that 100 million people could be pushed back into poverty by 2030 due to climate change impacts. In short, climate change is a direct challenge to the Bank’s organizational mission of eliminating extreme poverty and promoting shared prosperity.

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The clock is ticking

On February 18, Lebanon’s minister of finance nominated Ziad Hayek, an investment banker and expert on public-private partnerships. While the World Bank’s board of executive directors promised an “open, merit-based and transparent” process, Hayek was the only known challenger to the Trump administration’s nominee, David Malpass, former Bear Stearns chief economist, a US treasury official who was a negotiator for the recent IBRD/IFC capital increase, and currently a member of the US team working with their Chinese counterparts to resolve Donald Trump’s trade crisis.

Enthusiasm for Malpass seems restricted to various American conservative news outlets and commentators who support a nativist “American interests first” view of multilateralism, falsely accuse the Bank of corruption (a position Malpass has publicly taken in Congressional testimony), and see a reduction in lending to middle income countries—including and in particular, China—as urgent. This notion about China, and possibly other upper-middle-income countries like Turkey, is mistaken: “The World Bank is a bank, and it needs to be lending profitably to at least some of its borrowers. China serves that role very well,” Christopher Kilby, an economics professor at Villanova University, told Bloomberg. Slashing credit to China could also have unintended consequences for the World Bank’s efforts to combat global problems such as climate change. And it could leave the bank on the outside looking in, without influence over such major and controversial Beijing initiatives like Belt and Road.

Malpass will no doubt want to explain his positions on these matters in the context of the Bank’s long-standing global role beyond finance, in knowledge generation and translation, and as a convener on a broad range of global public goods. In the case of China, in particular, the World Bank’s long, trusted relationship continues to provide a deep, well-informed and collaborative perspective on China’s many, and formidable, development challenges. Continue reading