At the spring meeting of the World Bank and International Monetary Fund, US Treasury Secretary Janet Yellen, and Deputy Secretary of State Daleep Singh called for a total overhaul of the two institutions. Daleep Singh said the Bank was too conservative in lending because it was obsessed with maintaining its AAA rating for borrowing from capital markets to on-lend it to developing countries. This sounded barmy. Truth is, the Bank can do the riskiest lending, yet retain its AAA rating since it is backed by the richest governments.
Having worked in the Bank I can testify that its staff shovel aid desperately as each fiscal year comes to an end: their departmental budgets and promotions depend on lending volume. Hence, the Bank keeps lending to repeat delinquents. Far from being too conservative, the Bank and Fund have repeatedly accumulated huge bad debts that have to be written off.
Today the world stands on a new debt cliff. Sri Lanka has defaulted on its debt and many other countries look certain to follow suit. There are many reasons for this, but over-conservative Bank lending is not one of them.
The bigger question is whether we need the World Bank at all. Once, the Bank was the main source of funds for developing countries. Today it is a barely relevant pygmy. Once, NGOs staged mass demonstrations at Bank-Fund meetings to protest against filthy capitalism. Today no NGO agitators come because the Bank simply does not matter. India gets a few billions per year from the Bank against $65 billion from direct foreign investment, up to $80 billion from commercial loans and $87 billion in remittances from overseas Indians.
World War II destroyed all the world’s capital markets. The World Bank was set up to fill the breach. It lent first for reconstruction and then for development projects while global capital markets were gradually rebuilt. The IMF was created to oversee exchange rates and act as lender of last resort to bust countries.
By the 1970s the world’s capital markets had recovered substantially. The World Bank diversified from financing development projects to tackling poverty and social sectors like health and education. It set up a soft-loan window, the International Development Association, to assist the poorest countries. This was financed by grants from rich countries, not borrowing from capital markets. After 1990 the Bank helped finance the transition of communist countries to capitalism. But after 2000 it has become increasingly irrelevant.
In earlier decades, global savings were scarce and only the most creditworthy could access them. But savings skyrocketed after 2000, with China becoming a massive contributor. A global savings glut has replaced the old money scarcity. That glut drove interest rates down to zero in safe investment havens in the West. Desperate for higher yields, global savings sought riskier and riskier channels in search of higher returns. Argentina, a repeat defaulter, was able to sell perpetual bonds requiring no repayment of principal. China, once a big borrower from the World Bank, now lends more than the Bank and Western aid donors put together.
Private capital today channels trillions to dubious countries and companies, highly leveraged schemes, and cryptocurrencies. Gigantic sums flow into unicorns, start-ups that have never made a profit yet are valued at over one billion dollars each. India has over 100 unicorns and China almost 1,000. Investors know the majority of unicorns will go bust but persevere in the hope of finding one or two super-giants like Amazon or Facebook.
When trillions of private capital flow into the riskiest areas, why does Daleep Singh want the World Bank to go into riskier areas? Surely the Bank and IMF should be conserving their funds right now for debt relief to defaulters. Daleep Singh and Yellen say the Bank should harness more private sector funds. Why so, when a savings glut has created excessive flows?
Since the 1990s, the Bank has claimed that its comparative advantage lies in its vast pool of expertise on everything from sewerage and education to reconstruction in war-hit zones. Former World Bank president Wolfensohn called it “a knowledge bank.” Long after China became a capital-surplus country it still borrowed modest sums from the Bank for a very wide range of projects because it needed its expertise, not its money.
Domain expertise is available from commercial global consultants. Yet the Bank has a role as a development consultant. And it has a role in providing financial access to those still lacking it — the most backward and those devastated by civil war. The Bank can remain a downsized development consultant and financier. But there is no case for expanding it into a massive lender for riskier projects.
This article was originally published in The Times of India on May 1, 2022.