The World Bank reinvents itself – and puts poverty reduction at risk

Sierra Leone Telegraph: 21 June 2017

Three weeks ago, the president of Sierra Leone – Ernest Bai Koroma chaired the Sierra Leone Development Finance Forum, which was jointly organised by the World Bank and the country’s ministry of finance and economic development in the capital Freetown.

The aim of the event, according to the World Bank was to “unlock private investment in Sierra Leone so as to end extreme poverty and promote shared prosperity and development”. But critics of this new approach to financing development say that the World Bank is putting poverty reduction at risk.

The Koroma government’s programme for development – the ‘Agenda for Prosperity’, has largely been judged to be a failure, as poverty becomes entrenched and unemployment grows.

Speaking at the World Bank’s ‘unlocking private investment forum’, the president said that “emphasis should be laid on job-generating ventures in the key growth sectors of energy, tourism, fisheries and agribusiness”.

This new drive by the World Bank to lever $2.5 Billion of private investment into Sierra Leone’s fledgling industries, comes as the government signs a new three year $224 million IMF loan agreement to help stabilise the economy and improve banking liquidity.

But it also marks a major departure from the World Bank’s approach in financing development programmes in countries like Sierra Leone.

“Informed by the new private sector window established by the World Bank Group, beginning in July 2017—this bold and much needed initiative will help the Bank, together with their partners, to mobilize private capital and scale-up private sector development,” president Koroma told the Forum.

But the president expressed caution. He said that:  “This initiative must also be underpinned by aligning the public and private sectors with the shared objectives of unlocking the potential to create jobs and reduce income inequality…Contribute significantly to Sierra Leone’s sustained economic growth and enhance the country’s food and energy security; in tune with the attainment of the Sustainable Development Goals. It is a clarion call for deeper collaboration by all actors involved in the public sector, the private sector, multilateral development banks and institutional investors.”

The vice president for development finance at the World Bank Group – Axel van Trotsenburg, told the Forum that fragile states like Sierra Leone require more attention for job creation, economic transformation and to produce strong private sector activities. He said that the $ 2.5 Billion private sector investment will help foster support for Africa, and Sierra Leone in particular, to pursue development and transformation.

But many academics and policy analysts are sceptical about the World Bank’s new approach to financing development programmes in countries like Sierra Leone.

Writing in theconversation.com, Felix Stein – a Research Affiliate at the University of Cambridge, and Devi Sridhar – a professor of Global Public Health in the University of Edinburgh, say that: “The World Bank’s relationship with US president Donald Trump has raised concerns about its political neutrality in recent weeks, but a larger and potentially much more important shift in how the Bank operates is underway.”

“The World Bank” they say “is reinventing itself, from a lender for major development projects, to a broker for private sector investment.” This is how they describe the World Bank’s new approach and its underlying drivers:

In April 2017, World Bank Group President Jim Yong Kim outlined his vision in a speech given at the London School of Economics. He argued that development finance needs to fundamentally change in speed and scale, growing from billions of dollars in development aid to trillions in investment.

Kim said that there are significant financial resources readily available, literally trillions of dollars “sitting on the side-lines” on capital markets, generating little in the way of returns, particularly compared to what they could make if invested in developing countries.

Private investors’ lack of knowledge about these countries, and their tendency to remain generally risk-averse, mean that these funds remain largely untapped.

New role

In Kim’s view, the World Bank should therefore be a broker between the private sector and developing countries. Its future top priority should not be to lend money, but to “systematically de-risk” development projects and entire developing countries.

To do that, it will promote policies that make countries and projects attractive for private investment.

Kim hopes that this will enable private sector financing, while at the same time benefiting poor countries and their populations. In his view, the bank would mediate between the interests of a global market system, developing country governments, and people in poverty.

Kim provides several examples of this catalytic role: the bank’s International Finance Corporation (IFC) enabled private sector involvement in building and managing Jordan’s Queen Alia International Airport; the IFC and the bank’s investment guarantee agency MIGA helped privatise Turkey’s energy sector; and the IFC’s new risk mitigation program covers private sector investment risk with public money.

As a broker, the World Bank thus provides a mixture of services that range from investment and insurance to business advice and policy lobbying.

Power shifts

Kim’s vision would shift power away from the traditional lending arms of World Bank operations, the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), and towards the private sector arm of the bank, the IFC.

The IBRD, formed in 1948, provides loans and advice to middle-income and low-income countries which are deemed creditworthy. These loans are profitable, even if the IBRD does not work to maximise its income but aims instead to foster global socioeconomic development. The IBRD is largely financed via capital contributions it receives from its 188 member states as well as via the issuance of World Bank bonds. In 2016 it disbursed US$22.5 billion (almost half of World Bank Group disbursements overall).

The IDA was created in 1960 and provides low-interest loans and grants to the world’s poorest countries. It is funded by so-called “replenishments”, or donor commitments, generally every three years. Broadly speaking, it does not make a profit, but works mostly towards the goals of poverty alleviation and economic growth. In 2016 it disbursed US$13.2 billion (slightly over a quarter of group disbursements).

The IFC, created in 1956, aims to foster private sector involvement in development projects around the globe. In 2016 its disbursements amounted to US$10.0 billion (one-fifth of group disbursements). Its work has been severely criticised by activists, academics and civil society organisations. They argue for example that the IFC has exacerbated inequality in health and famously, concerns persist about the fallout from its attempts at water privatisation.

The rise of private finance

The role of investment broker makes sense from the World Bank’s own perspective, if we take into account the larger political economy context of development. Low and middle-income countries have become less reliant on World Bank lending, given increasingly attractive alternative sources of financing; the current US and UK administrations favour trade and business over development aid, and private finance has in past decades rapidly outgrown other parts of economic activity.

The World Bank therefore risks becoming irrelevant unless it reacts to these trends. Moreover, since its founding articles of agreement define the bank as an institution that facilitates private sector investment, its role as a finance broker does correspond to its core mandate.

However, making the private sector its first port of call may fit less well with the goal of making development work for the world’s poorest people. Two major concerns are worth highlighting. First, why exactly should assessment of the value and effectiveness of development activities primarily be made with reference to their profitability for the private sector?

As French economist Thomas Piketty has shown, when left to its own devices the rising power of private capital markets is a force for, rather than against, income and wealth inequality. Surely, the most important question to ask is thus whether the private sector does enough for people living in poverty or in highly unequal societies, rather than vice versa.

Second, what makes this renewed turn towards private sector solutions so much more promising today than during previous decades when Kim himself had vigorously criticised them? In his LSE speech, he remarked that the bank has learned from past mistakes.

Yet, “de-risking” entire countries for private sector investors is likely to include policies such as strict inflation controls, large-scale privatisations, rapid trade liberalisation and strong government cutbacks on social spending. These have in the past made World Bank lending activities notoriously destructive for developing countries.

In Bolivia, for example, structural adjustment policies imposed as part of World Bank lending conditions from 1985, led not only to a rise in unemployment and a reduction in public revenues, but eventually to countrywide riots over water privatisation and resulting price hikes.

Even if we leave aside concerns over the financial transparency of the corporations which will be involved, the bank’s changing role reflects a worrying shift in how the development sector operates more widely.

There may well be vast amounts of capital waiting in the wings, but putting development work in the service of private capital creates a new risk altogether – that of people in poverty being pushed out of sight.

About the authors

Felix Stein is a Research affiliate at University of Cambridge; and Devi Sridhar is Professor of Global Public Health in the University of Edinburgh, writing in theconversation.com

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