CHAPTER 14

Pushing Back or Extending the Frontiers of Development Finance

All the institutional investors in the world combined will soon manage $100 trillion, so you know that not all of them can invest in negative-yielding sovereign debt. There must be solutions for financing sustainable development, and these solutions have to include more than just official development assistance (ODA) or solely the actions of public institutions. Instead, we must go off the beaten path: mobilize all available forces, put the most diverse players in touch with one another, and use the financial system (its tools and institutions) as a catalyst. MDBs, including bilateral institutions like Agence française de développement (AFD, the French Development Agency) or the US Agency for International Development (USAID), have a historic role to play here—provided that they know how to reinvent themselves. Today, these organizations are being complemented by large philanthropic groups, many of which can move faster and be more targeted than their more bureaucratic cousins. Such philanthropic groups play a valuable role and are powerful and rightfully impatient allies to the MDBs and bilateral agencies.¹

The Development Bank Model: Still Valid?

Can a few billion dollars in capital make a difference in a global economy that has a GDP of more than $75 trillion, and considering that institutional investors will soon be managing $100 trillion?

The question of the relevance of the model of the development bank paradigm is a recurring one that is doubtless never posed clearly enough. By “relevance,” I mean the combination of the fact that it is unique (no one else can offer what you are offering), useful (you are really making a difference), and well adapted (you are acting in an appropriate manner). The question had already been asked before I joined the World Bank Group.² Now, almost two years after my departure, I still hear it. The idea kept me busy throughout 2015, because the three conferences, in Addis Ababa, New York, and Paris as discussed in Chapter 4, were meant to redefine the framework and terms of development financing.

Some people might still be tempted to ignore this question of relevance by pointing to 70 years of continuous expansion, in a world that has profoundly changed, at a level sufficiently high to prove the efficacy of the model. We can also argue that the recent establishment of the New Development Bank (also known as the BRICS Development Bank) and the China-led Asian Infrastructure Investment Bank (AIIB) confirms that this tool is still right, since newcomers are seemingly copying it with only a few adjustments. The relevance of the model is rightly regularly questioned. Whether it is relevant is still to be determined and requires constant adaptation to changes in the world.

Obsolescence is a risk, one that is more tangible today given the many changes that have occurred since the last significant readjustment of the model at the end of the 1990s, before the adoption of the MDGs. As we have already explored in some detail, the world underwent multiple shocks during the new century’s first decade that should have affected the development bank’s model.

The transformation of the world’s economic map caused by the great strides made by the emerging economies raises some financial and governance questions. The needs of these economies have changed as their expectations have grown more sophisticated and their demands for funds have increased. The slowdown in global growth also shows how these economies are increasingly interdependent, with spillover and spillback effects.³ These new phenomena demand the construction of a worldwide network of secure financial networks as well as broader risk sharing, involving a readjustment in the way development banks operate.

Readjustment is even more necessary because South– South cooperation is emerging in parallel. In the 1990s, the World Bank alone committed to half of all multilateral development finance, which is no longer the case today: the establishment of the AIIB and New Development Bank in 2014 clearly signaled a change in the competitive landscape. This is a positive change because competition is beneficial in general, because it strengthens the multilateral approach to cooperation after years of criticism directed toward China for its individualism, and because it can help solve the problems that we have not been able to handle alone. An additional capacity of $10 billion or even $20 billion per year, in a world where the needs are in the trillions of dollars, leaves plenty of room for everyone to contribute. There is no need to take offense at the creation of new lenders of regional and multilateral funds.

Regulatory Changes of Private Sector Banks and the Need for the MDBs to Step Up Their Game

Another structural upheaval for those active in development has been the transformation of the traditional role of banks in the financing of the economy following the global financial crisis. Because of regulatory changes and market expectations, it has become more costly and less attractive for a commercial bank to finance complex, risky, and exotic projects over the long term, in other words, far from the domestic market and its natural habitat. This is particularly clear for infrastructure, but it also rings true for health and education. The capacity for financial action is now found more often in the hands of institutional investors. Yet although these actors may be taking a central role in financing the economy, they are still not fully able to invest in emerging and developing economies. It must be recognized that they do not operate like banks. Their margins are lower.⁴ They do not have branches or employees in different countries, and, for the most part, they do not really understand these economies. Add to that the fact that they have their own regulatory constraints (the most commonly known being Solvency II for insurers). Under these conditions, the MDBs clearly have a role to play as intermediaries between the immense needs identified and the many investors in search of yield and purpose, to make sure that funds are injected into attractive projects that will definitely create jobs and be profitable, under an appropriate framework. The MDBs need to have skin in the game and with that be a true catalyst for private funds, giving them the comfort to join in.

This role for the MDBs is even clearer because the private sector is now recognized as key for development. As we have seen, that is probably the biggest, and least visible, change since 2000 and the adoption of the MDGs. In the meantime, although public development aid has nearly doubled, it has declined relative to other financing sources such as direct foreign investment, transfers of funds, and, more generally, the North– South flow of private investment. Far from being a source of dirty financing, this private money is indispensable and welcome. Remember that the market financed a large share of the infrastructure produced in industrialized countries over the past two centuries, which has been satisfactory overall, whether the operators were public or private.

Let’s not deprive ourselves of any of these resources. Domestic public resources, which were used in the 19th century, along with savings, to equip the Industrial Revolution, are central to the financing of economies and must be increased today with a higher, more evenly balanced tax.⁵ But is it not equally relevant to draw from the enormous reservoir of private savings that globalization has made available to the planet as effectively as possible? And could we not draw on public transfers to create a leverage effect? In a world where the new agenda is to go from “billions to trillions” to finance the sustainable development of our planet, the SDGs as well as the COP21 objectives demand that we tap the potential from all financing sources and capabilities available worldwide.⁶ Nevertheless, these resources must be channeled so they can be directed to projects that make sense, to work for inclusive growth and shared prosperity that benefits the poorest first. This is where the need comes in to implement the necessary means for effective “intermediation,” by using all types of instruments that can distribute risks, particularly the key instrument—guarantees.⁷

These instruments can be of different kinds (including credit, foreign exchange, and political risk) and are one of the most powerful engines to mitigate risks and mobilize resources for social objectives.

The most recent change to affect the MDB model is that of taking into account new shared global concerns such as climate, fragility related to migration and pandemics, and even the equality of men and women. These questions surround and will even go beyond traditional global public goods. Faced with an alarmingly fast increase in losses attributable to natural disasters tied to human impacts on climate, as we have seen, climate financing has become a subject in its own right with new products (green bonds, for example) and new approaches (in terms of types of projects, rating, and even risk management). Fragility is also a case that requires a paradigm shift: it requires mobilizing capital for high-risk projects but also developing new financial instruments to mitigate these risks.

Deciding whether questions like gender, diversity, and minorities need to be taken into account in financing policies starts by acknowledging that the change in thinking has been too slow here. When an institution like the World Bank has to work with Uganda, which has a restrictive vision of some human rights, should it put conditions on its aid? And should it do so without repeating the past mistakes attached to some conditions. Fifteen years ago, no one had really addressed this question. Now is the time.

In the past 15 years, an approach to finance via the prism of gender has slowly spread, based on the idea that finance can help promote women in society. This is a smart bet, particularly in emerging and developing countries, where women prove their determination and initiative every day. I visited Henan, China, where two small and medium-size enterprises were run by Chinese people and supported by the Bank of Luoyang, itself financed by International Finance Corporation (IFC) as part of a program introduced by the World Bank to make it easier for women entrepreneurs to gain access to financing. One of these entrepreneurs was the head of an online commodities trading platform, very focused on the “new economy,” and the other was an Ikea supplier, who took me on a brisk tour of the giant hallways where the products with “barbarian names” used by the Swedish furniture maker were lined up. The contrast was startling, but each of these women entrepreneurs had real charisma and the same urge to create.

However, the question of how to approach these global public goods remains to be addressed. For many years, the temptation was to create “global funds,” for example, a fund for education, forestry, or the oceans. The approach had its virtues, particularly in terms of visibility, fund-raising, and, in some cases, results, but it did not handle interdependencies between all the questions, which a more integrated financial institution should be able to respond to in a satisfactory manner. We have yet to find the perfect balance. In all of these fields, a development bank clearly has a capacity and specific duty to act where no one else could.

Rebooting the System While Preserving Its Essence

Those involved in development and multilateral institutions, in particular, must learn from these major changes and adapt the ways in which they operate. How do we establish the optimum size for a balance sheet and what incentives do we use to maximize it? How can we ensure that funds are managed productively in a context of tight public budgets and increased public sensitivity to cost effectiveness? How do we promote new financial instruments, including those for green financing, catastrophic risk management, and support for women entrepreneurs? How do we encourage multilateral institutions to integrate private sector partners into their activities? How do we develop the capacity of these banks to mobilize institutional investors and their intermediation? How can we extend and value the key instrument of guarantees? There are so many questions that must be faced squarely in the debate over the revision of the risk category and financing of the World Bank Group and other similar institutions.⁸ These questions and how to provide practical answers were at the heart of the few years I spent at the World Bank. I enjoyed success, but I also felt frustrated, and left with one conviction: change is necessary and doable. That is what the following sections are about.

Making the Most out of the Precious Public Money Made Available

When I joined the World Bank in early 2013, I quickly observed that for most teams, the debate over the increase in capital granted in 2009–2010 was over. This debate occurred after the World Bank had made a major effort, reaching a new record of committing over $44 billion, before returning to more modest levels of commitment of around $15 billion per year, where it seemed content to stay. Rebuilding IDA’s resources at the end of 2013 was dependent on the tight budgetary resources of larger donors, particularly in Europe, even though the institution was fixed on the ambitious objective of eradicating poverty by 2030. With a total commitment capacity estimated at $50 billion per year for the whole World Bank Group, the general sentiment was that to do more was impossible.⁹ The idea of rethinking the levels was not really considered as an option. From a financial point of view, the priority was to ensure that the bank made the most of the resources available.

For my part, I arrived with a few simple ideas in mind. My main conviction was the following: The World Bank Group is not a global development agency, or at least not just that! It is also a bank, and that is precisely the difference between that institution and others that work in the same field. What does it mean to be a bank? First, it has a balance sheet, and therefore has the capacity to project itself into the future and play with time. Next, it has the ability to take risks, measure them, and select the best way in which to manage them. It has access to all types of markets and their associated infrastructures (from ratings to swap agreements and reinsurance contracts). It is able to form and structure partnerships. It does not depend on budgetary support decided on an annual basis, or the ability to make profits and keep them to build and develop its capital. To be named “World Bank” is incredible, if you want to work in such a field. There’s really no better name and brand!

These ideas were not obvious to the various World Bank Group stakeholders yet. As one of the people assisting me with financial reform put it, the general understanding of the World Bank’s model up to that point was something like “Give me the money so I can spend it.”¹⁰ My interpretation had been “I don’t know where the money comes from and I don’t care, but I know my idea is good and your job is to make sure that my idea or my project is financed correctly.” The idea that the institution is a bank first, and thereby offers flexibility as well as interesting opportunities and constitutes a key instrument in the international plan, was not fully appreciated by the system. I was convinced that operating with the banking model and taking full advantage of all of its potential would be the most efficient way. If the economic and financial circumstances that necessitated a restructuring of the system call for the financial capacity and paradigms accepted until now to be reconsidered, they should also preserve its essence. A development bank is, before anything else, a bank, and that is what makes it relevant.

The reform carried out at the World Bank was therefore intended both as a readjustment of traditional approaches and an attempt to adapt to a new global environment. Among the four objectives that I set, reestablishing the financial viability and making the model self-sufficient and sustainable were fundamental: it was a question of both capacity and credibility. In fact, any bank has the obligation to be profitable in order to grow.¹¹ Profits not distributed are the basis for an increase in capital, which in turn develops financial capacity. The mechanics of this virtuous cycle seems clear, but it is lost sight of too often. In contrast, a vicious cycle is set up when expenses exceed revenues and capital decreases, first in real terms and then in nominal terms. In a bank, revenue and income must be linked: there is no wiggle room like there is with governments, which can use deficits as an option. This is also a question of credibility for an institution that explains to its public and private partners on a daily basis how to manage their financial situations and adjust their accounts. When you are entrusted with public resources, in the form of capital or grants, you have an obligation to show that this money is used in a sustainable manner. A potential increase in capital will be required only if it is clear that all additional capital will benefit clients and not a system under pressure. It is management’s responsibility to ensure that the institution does its homework.

A Useful, Unique, and Well-Adapted Model

The reform conducted by the World Bank was radical and perceived as such. The institution needed it. In fact, it had broadly anticipated the request expressed by the G20 to optimize the MDBs’ balance sheets, to restructure and develop over the long term, rather than show off who had the larger balance sheet.

I found myself, quite unexpectedly, recalling these fundamentals while I was traveling in Xiamen, China. During an official banquet, the deputy governor of Fujian Province (one of China’s most prosperous provinces and one that is open to private capital), gave a slightly sarcastic toast: “Monsieur Badré, the World Bank is very nice, but if it were a Chinese bank, you would be the 10th largest; you are not that big despite being a ‘World Bank’!” 

My host had put his finger on the truth, but the implication was not one I let trouble me. I replied, “Certainly, but don’t forget that it is easy to make a bank grow: it is harder to make it grow up healthy. It is easy to churn out credit, make a ton of loans. It is harder to make sure that borrowers can repay them. In addition, the size of the balance sheet is not the only thing that counts. The ability to work with others and to foster cooperation is also important—and this is the case with China, for which the World Bank opened up development a lot by working with Deng Xiaoping, in particular. . . . Beyond the numbers, it is this intangible reality that makes all the difference.”

What makes the World Bank useful, unique, and well adapted in this case, and what justifies its existence and role in this new era that has begun? Its relevance will rely on the right combination of the following ingredients:

»   Its capital and its knowledge

»   The capacity to be public/private and engage in partnerships of all kinds

»   Its focus on innovation and implementation

»   Its openness

»   The full leverage of its global dimension

The World Bank Group is not a consulting firm or a savings bank. It provides both financial and consulting services. This is what differentiates it from most UN agencies, for example. The other MDBs share this characteristic, even if the relative proportion of finance and advice may vary from one institution to another. This supposes that the World Bank maximizes use of its financial capacity while respecting the restrictions imposed by its rating, and protects its knowledge, making it profitable and accessible in an appropriate, simple, and attractive manner, to all of its clients and partners. The knowledge must be constantly updated and available to the system continuously.

The World Bank Group includes different institutions that have both public and private clients. People often talk about IFC as the bank’s “private arm” and IBRD as its “public arm.” This is largely true. But what makes the World Bank unique is its solid foundation with both groups of clients. Most MDBs are oriented toward the public sector. The European Bank for Reconstruction and Development is mostly focused on the private sector. The Inter-American Development Bank in Latin America is continuously expanding its private sector approach with strong support from its shareholders, but none of them yet have the depth or breadth of the World Bank Group, with its potential to unite public and private forces. However, this potential is not enough. This is not only about having the private sector on one side and the public sector on another but about combining these forces when needed. Yet this combining is not always clear, despite the progress in recent years. This is why one of the reform objectives was to make sure that the collaboration with private actors was real, effective, and not artificial, knowing that in a world where suspicion between various actors remains, a new, audacious approach was necessary.

With its central placement and ability to bring all of the actors together (“convening power”), the World Bank Group has a unique ability to structure all types of partnerships from fiduciary funds to working groups by going through coalitions. If partnerships are possible, it is because of the World Bank’s banking and operational structure, but also, and perhaps most importantly, because of the entrepreneurial spirit of its teams. The task still remains to better organize and prioritize all these forces based on the priorities suggested by shareholders, and in particular to better structure the capacity of the bank to mobilize capital granted by third parties and not let bureaucracy consume it all.

In the post–financial crisis world, development banks must be as much financing tools as mobilization tools. They need to use their own capital directly, and they also need to use their resources indirectly to mobilize money from others, in particular, from private investors. Clearly, financing is a priority. It provides a voice to attract attention and command respect. That is why it was important to develop the World Bank Group’s capacity for engagement. But MDBs also have a major role to play in generating leverage, which in my mind is the only way to obtain capital and innovative products. The From Billions to Trillions report was a strong declaration in this sense: “Due to our vast expertise, MDBs and the IMF are drivers of finance for the entire development community, with business models that we authorize not only to provide much needed policy advice, but also to act as a catalyst in mobilizing and obtaining funds from various sources—moving from traditional ‘development financing’ to a broader and more global ‘finance for development’ approach.”¹²

For a long time, most development banks have mobilized private capital, in the sense that any investment has an exponential effect that can attract additional private investments. At IFC, which is more specific in its accounts, mobilized capital is raised for remuneration via various channels.¹³ But MDBs can go even further. They have a specific duty to act as an intermediary with institutional investors, which now are more central to the financing of the economy, to steer their funds to more interesting projects. Over the decades, they have shown that it is possible to generate real yields from emerging and developing markets. They can help overcome the risk perception gap, which discourages actors from investing today in some countries. They have the advantage of being less costly, thanks to their high-quality rating, their instruments, their credit mitigation guarantees, and even their technical assistance. They can, for example, channel appropriate funding via refinancing of local banks. They can also help countries develop solid regulatory frameworks and a business climate likely to attract growing funding streams.¹⁴ They can still contribute to the development of capital markets and local financial markets—these can represent opportunities for domestic savings and stable and sustainable sources of financing for the economy, often key to a country’s capacity to support its own development.

Helping Others Help Themselves

I am a staunch supporter of including this last lever. As our water group says, “There are many reasons to encourage local savings and the formation of financial markets in emerging and developing countries: setting up local savings and not seeing it go elsewhere encourages a better job-resources balance and decreases financing costs.”¹⁵ MDBs have a crucial role to play in triggering this virtuous cycle. In local capital markets, which “most often only exist in an embryonic state and only handle symbolic business, most often for the purpose of financing the Treasury,”¹⁶ they can use their AAA rating to issue local currency: by drawing the attention of investors and stimulating business, the local market gains in volume and sets an anchor for future developments for the greater benefit of companies and governments. Since 2011 the World Bank has issued over $9 billion in bonds, denominated in two dozen currencies, including, for the first time, Ugandan shillings, Thai baht, and Chinese yuan. For its part, the IFC has issued 14 bonds in national currencies since 2002, in countries where it has often been the first international issuer in the bond market. It issued bonds in Rwanda, and negotiations are ongoing with other developing countries in Africa and Asia, as well as with developing countries in Europe and Latin America. In fact, the mechanism offers opportunities regardless of the level of advancement of the economies. By enabling Rwandan stakeholders to purchase a World Bank Group note in Rwandan francs, for example, the bank provides them the assurance, thanks to the AAA rating, that this is a high-quality note. That gives the market visibility both in terms of price (we know how much a AAA note is worth, so we can invest on this basis) and confidence. Another example is India, which is certainly more advanced, but whose currency is not convertible. At a time when its economy was in chaos on the market, by being able to issue a rupee note “offshore,”¹⁷ it could recycle Indian savings to invest in the national economy. This is a convincing illustration of the usefulness of finance in the service of the public good.

But MDBs can go even further. The tools already at their disposal are valuable and would create even more value if they were multiplied and adapted to meet the specific needs of each country, each partner, each investor—and to meet each global challenge. The objective would always be to create confidence. MDBs, which have long acted as a bridge between the public and private sectors, able to gather a variety of actors around important development questions, have a responsibility to show the way in this field.

In this rapidly changing world, innovation is a prerequisite. We have seen how finance has been inventive in this field. The tools used wisely can create financial capacity to better serve clients, or even help manage risks more efficiently. This attractive characteristic of the development bank model is often ignored or overlooked. One of my priorities in the reform led by the World Bank was to emphasize precisely this capacity for innovation that an AAA rating confers on the bank—as well as its staff of several thousand highly skilled employees and its capacity for mobilization—to strive to better adapt themselves to new needs and expectations. People have often reproached me for being a “banker”; I completely understand this criticism. But I sincerely believe that a banker can also contribute to making a difference and helping the most vulnerable. Finance has clearly shown its potential for destroying value: there still is time for it to show its usefulness.

No institution other than the World Bank Group and other MDBs have a real capacity to play the role of financial laboratory for the global community. To have an idea of the underlying force, all you have to do is count its flagship publications, which are widely recognized, or its numerous conferences and meetings that its teams organize every day around the world. Even so, the World Bank is not an academic institution—it cannot be, nor should it be: it must strike the right balance. The World Bank should not be a simple repository of fixed knowledge: it must be the instigator of new ideas, in both finance and development policies. And it must be able to implement these ideas in the field. The more than 70 years of experience the World Bank has is irreplaceable, because the capacity to implement is the most important skill and takes the longest time to acquire. This requires fighting constantly against freezing or fossilization of expertise.

The capacity for openness is the essential antibody for any bureaucratic institution, whether public or private. Any large group has a tendency to take this path and start to withdraw into itself when clients are too far away. At a time when high-performing organizations are undercapitalized and ultraconnected, the World Bank Group must stay open to the outside world and keep listening for changes in the economic, digital, and academic worlds, and more. In a group so large, with such an extensive workforce, there is a risk of losing contact with the rest of the world and playing a game of “us” against “them.” This risk can be limited by making sure that there is always a close connection between the majority of employees and the World Bank’s clients. From this point of view, I think that there is a disproportionate number of employees at the headquarters in Washington compared to those in contact with clients in the field. Change should not happen once in a while but should be a state of mind and should be delivered on a continuous basis.

Finally, the World Bank is doubly global, and this is what makes it truly unique and different from other development institutions. It has a global presence with offices in more than 100 countries. Its network is a key asset, of which it could make even better use. It is also global because of its access to global decision making, which offers a range of opportunities that are still little understood.

Despite the challenges, including doubts about multilateralism by a number of newly elected governments and increasing competition, the World Bank Group has all the ingredients it needs to stay relevant in today’s world. But nothing is permanent: relevance cannot be taken for granted. It must be proven day after day with all the ingredients it has been granted, as described above.

The miracle of Bretton Woods has done well to survive for more than 70 years. It is fragile, but it should stay the course for a few more decades if the model is adapted generation after generation, and if the bank draws on the best part of the banker’s intuition of the founders, despite growing pressure against multilateralism (this should be part of an adaptation strategy, not a dismantling). Contrary to how we too often tend to think, finance is not a by-product of the institution but is instead essential to the performance of its mission to end poverty.

If there is a place where the mission of finance is to save the world, it is the World Bank, along with other MDBs. And if there is a laboratory where all the ways to regain control over money to serve common good can be tested, it is the World Bank and other MDBs. This cannot be taken for granted, as we have seen. And the MDBs cannot, and should not, stay on their own and work in isolation. They are part of a broader system whose emergence needs to be encouraged at the confluence of public commitment, private interests, and civil society action.