Manifesto for survival: World Bank’s bold new thinking on how to finance a better world

World Bank president Ajay Banga recently spoke of the need to press private finance into service to tackle climate change and other critical objectives
While those in asset management might protest about losing investment freedoms, his logic is hard to argue with

Anthony Rowley

Published: 3:30pm, 21 Oct 2023

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The outline of a new form of capitalism – neither American-style market capitalism nor Chinese-style state capitalism, but what could instead be called “institutional capitalism” – could be discerned at the recent annual meetings of the IMF and World Bank.

At these meetings and in his first major speech as World Bank president, Ajay Banga referred to the need for imaginative new ways of employing the massive hoard of global private savings.

This was not a ritualistic reference to the need for public-private partnerships to unlock investment in socio-economic projects such as climate change alleviation, infrastructure building or health spending. It was more of a manifesto for survival.

Banga was venturing into highly political territory. In market economies, the freedom to deploy investment at will – however serious or frivolous the objective – is almost sacred. State or any other kind of dirigiste intervention is not normally welcomed.

In state economies, the opposite is true and private enterprise has to walk a fine line between freedom and the threat of repression, as is the case in China. So, the kind of pragmatic compromise Banga was suggesting is bold and worth hearing.

He went so far as to state the sum of money – US$70 trillion from pension funds, insurance companies and sovereign wealth funds – that might be pressed into the service of critical objectives.

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This figure vastly outstrips the amount usually talked about in the context of government spending, and the plan might be challenged by some on the grounds that private investors would never agree to risk such sums.

The conventional view has been that expenditure on public projects is the liability of taxpayers, while individuals are free to spend or invest where they will, once they have paid their taxes. The idea that the flow of funds within a society is fungible has not really taken hold.

This is where the debate has been stuck until now in market economies, although China and other state-led economies that enjoy control of public and private revenues have been able to channel flows into areas like climate change and infrastructure.

In market economies, by contrast, taxes and government borrowing finance most public spending while private investors have to be cajoled into funding projects at the margin.

This is where Banga had something refreshingly new to say as he unveiled a “new playbook” for the 79-year-old institution now under his stewardship. It envisages multilateral institutions like the World Bank helping to guide private institutions to development projects, beginning with renewable energy projects to replace coal-burning power plants.

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This would presumably involve some repackaging of World Bank loans into securitised ones acceptable to investment institutions. The bank envisages funds being directed by governments, financial institutions and others to a “Livable Planet Fund”.

All this would require financial engineering but the plan makes more sense than empty assurances such as that by UN climate envoy Mark Carney at the COP26 summit that private financial institutions could deliver US$100 trillion to meet climate change costs.

In theory they could, but in practice they are not going to stump up more than a fraction of that amount without guarantees, and who is going to provide that? The task is beyond the reach of individual governments but not of multilateral institutions acting in concert and this is precisely what the World Bank plans now.

I have often commented that if multilateral development banks (including, in Asia, the Asian Development Bank, the Asian Infrastucture Investment Bank and the New Development Bank) did not exist, they would need to be invented.

As the head of the World Bank takes the idea of leveraging the power of multilateral development banks to new levels, the importance of this development cannot be overstated. As Banga said, all generations face challenges, but the challenges facing the current generation are unique and even existential.

Global economic growth is slowing and recession threatens, inflation still nags, interest rates are high, world trade has slowed, poverty is rising again, pandemics remain a threat and looming over all this is the scourge of war and climate change.

In short, it’s pretty obvious to all but the most myopic that global financial resources are going to have to be mobilised “at scale”, as Banga said, to deal with these manifold threats if the world as we know it is to survive.

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An alternative would be the spread of state capitalism and more authoritarian regimes as crises unfold. But if any kind of liberal economic order is to prevail, it will have to be via more serious public-private economic cooperation and Banga’s ideas are a good starting point.

There will no doubt be those in the financial asset management industry and elsewhere who have a vested interest in preserving the current investment freedoms and who will protest against the “financial socialism” implied by Banga’s plan.

But absent radical new thinking on how to close the yawning savings-investment gap as socio-economic challenges grow, investment freedoms will anyway be eclipsed by survival imperatives.

As Banga put it, “We must find a way to finance a different world where our climate is protected, pandemics are manageable – if not preventable – food is abundant, and fragility and poverty are defeated.” It’s hard, and indeed foolish, to argue with the logic of that.

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