How the new World Bank chief can stop ‘mission drift’

While the multilateral organisation has sometimes behaved like a social lending institution, the new president should pull the institution back onto a more bank-like track
If he can persuade its government shareholders to allow the bank to ‘securitise’ some of its projects, it would open the door to a new hybrid form of private and state capitalism

Anthony Rowley

Published: 11:00pm, 4 Mar 2023

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The World Bank was an ingenious invention under the Bretton Woods monetary architecture launched in 1944. It was, however, designed originally to finance reconstruction in post-war Europe rather than being a “world” bank as such and its Western orientation has created an identity problem ever since.

This is apparent in the nomination of Wall Street financial services expert Ajay Banga as prospective new president. Competent though he no doubt is in his own field, he is the latest in a long line of US politicians, trade, defence and other figures nominated to head the bank.

Others among the World Bank Group’s 189 shareholder countries still have time to propose an alternative candidate. The economically powerful Asian nations should seize this opportunity to ensure that whoever is chosen will combine Asian pragmatism with Western development ideology.

Currently vice-chairman at the New York-headquartered “global growth equity” firm General Atlantic and a former CEO of Mastercard, Banga is seen as someone who will steer the World Bank Group firmly in the direction of fighting climate change, into becoming a more “green” bank.

This is yet another change of course for a nearly 80-year-old institution that has swung from being a European infrastructure bank to a lender to the “third world”, a poverty alleviation bank and then through incarnations such as health, education and other services provider.

The Washington-based World Bank and the regional development banks that support the United Nations’ development agenda were reminded of this “mission drift” when China launched the Asian Infrastructure Investment Bank (AIIB) in 2016 with a much sharper focus on project lending.

The International Bank for Reconstruction and Development, as the World Bank’s core operation is known, has sometimes appeared to forget the fact that it is a “bank” with a unique capital structure and access to public and private funds and has behaved like a social lending institution.

International Monetary Fund managing director Kristalina Georgieva speaks with World Bank President David Malpass during the development committee plenary at the World Bank-IMF annual meetings in Washington on October 19, 2019. Malpass, who has been facing calls for his resignation for months over climate change-related comments, recently announced he would step down nearly a year early. Photo: AP

If Banga is confirmed as president by the World Bank’s shareholder countries, a likely although not foregone conclusion, and is able to grasp this reality, and use his financial services skills to pull the institution back onto a more bank-like track, that will be a good first step.

But it will not be sufficient to win the battle against climate change and other massive challenges such as infrastructure financing which are going to cost trillions of dollars in total and not the billions that multilateral development banks currently mobilise directly.

There is little point in mouthing platitudes, as US President Joe Biden has done, about the ability of the latest US nominee to mobilise private-sector funds unless the scope of the climate change and other challenges is accepted.

It seems that Banga is expected to emphasise the World Bank’s role as a lender to developing and emerging economies, so that they can overcome the climate change and related challenges. But this is only half the role the World Bank needs to play.

Advanced nations, too, not least the US and those in Europe, will need multi-trillion-dollar investments in climate change, particularly in so-called transition finance. The World Bank and other multilateral development banks will need to play a much bigger role than generally realised in these nations.

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Private savings that are currently channelled via capital markets into areas such as climate change, infrastructure and healthcare are nowhere near big enough to meet the need. Without the World Bank and others to act as financing conduits, financing will simply fail.

This demands a major rethink of how market and state capitalism operate, and of ways to collect and invest savings in Western economies. Absent such a rethink, governments will need to raise taxes to meet the funding gap.

World Bank and bodies like it need reform, but still play critical role

The World Bank and other development banks could be critical catalysts for directing private funds into areas like climate change, provided they are given greater and more direct access to private savings. For this to happen, Banga or whoever becomes World Bank president will need to think creatively.

It is not possible for investors to buy shares or bonds in the World Bank as individuals, though many would like to get more directly involved in socio-economic projects rather than taking indirect routes such as environmental, social and governance (ESG) investment. If the new World Bank chief can persuade its government shareholders, not least the US, to allow the bank to “securitise” some of its projects – in advanced, emerging and developing economies – that would open the door to a new hybrid form of private and state capitalism.

It would also mean that the considerable human and financial resources of the World Bank – from engineering and project skills to health and welfare resources, not to mention administrative resources and legal heft – could become more widely used.

Vehicles move down Altamont Pass Road with wind turbines in the background in Livermore, California, on August 10, 2022. Not just emerging countries, but advanced nations, too, including the US, will need multi-trillion-dollar investments in climate change. Photo: AP

If the new World Bank president can take the lead in guiding the institution into such an expanded role, other multilateral development banks at the regional and subregional level, not least the Asian Development Bank, are likely to follow suit.

The AIIB, owned by 106 countries, among which China, India, Russia and Germany are the largest, could offer useful lessons in state-market collaboration. Unapologetically an “infrastructure” bank, the AIIB has avoided the ideological and mission swings of the World Bank, and similar pragmatism needs to be applied to climate and infrastructure lending.

What is needed at the World Bank is radical new thinking and not simply a new president.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs