In World Economy News 10/04/2015
World Bank President Jim Yong Kim doesn’t see China’s launch of a new development bank heralding the end of the global economic order forged by the U.S. as Harvard professor Lawrence Summers has warned.
Instead, it could cement the World Bank’s influence for years to come.
In a wide-ranging interview at Bloomberg headquarters in New York on Wednesday, Kim laid out his vision for how the World Bank will coexist with development banks led by China and other developing powers.
Kim said the lender is willing to go beyond just co-financing projects with China’s planned Asian Infrastructure Investment Bank, or AIIB. His institution is open to managing the procurement process and enforcing safeguards for the AIIB’s initial projects. He’d also be willing to send World Bank officials to help the AIIB build up a development agency to the standards of existing institutions.
It’s an example of the kind of expertise-sharing role Kim sees for the World Bank, which was conceived during World War II to help rebuild Europe, as the AIIB and other development banks enter the market.
“The World Bank Group has 2,000 Ph.D’s — some say it’s the most of any institution,” Kim said. “Yet these folks, men and women from all over the world, have had real experience trying to make things work.”
Poverty Lending
Kim, 55, said an introductory meeting with Indian Prime Minister Narendra Modi ran overtime after the World Bank president was able to share what his institution had learned about public-private partnership. “Literally, as I was walking out the door, he tweeted, ‘We don’t need their money, but they’re going to be our information bank.’”
“It’s knowledge, but it’s a very specific type of knowledge,” Kim said. “The fact we have this knowledge is because we’re a bank.”
China will likely have its own advice to give the World Bank, said Kevin Gallagher, a professor of global development policy at Boston University. Until recently, the World Bank “all but abandoned” financing infrastructure projects in favor of “micro-interventions,” he said.
The World Bank is “far from the frontier of new thinking and practice on infrastructure,” Gallagher said in an e-mail.
Loan Demand
The World Bank doesn’t plan to get out of the lending business anytime soon. Kim said that if loan demand from developing countries continues at its current pace, the Washington-based bank may need its 188 members to increase its capital within three years, though he wouldn’t specify by how much.
Still, Kim says it’s inevitable that policy makers will have to accept the emergence of the AIIB and other institutions, if only because of the estimated $1 trillion in additional funding per year that the World Bank says developing countries will need to meet their infrastructure needs.
Kim’s endorsement of the AIIB contrasts with the position taken by the Obama administration, which has refused to join the Chinese venture even as allies including the U.K., Germany, South Korea and Australia signed up.
“When President Xi Jinping announced the AIIB, I think most people knew it was going to happen,” Kim said in response to a question about the Obama administration’s opposition. “I’m a really firm believer in multilateralism. Generally speaking, I would always encourage countries to embrace multilateralism.”
China’s Embrace
Kim added that, “to see this as one country versus another is to miss the point that this is a huge, important, powerful country making its first major step into being a sponsor of multilateralism.”
Treasury Secretary Jacob J. Lew said in a March 31 speech that the U.S. is ready to welcome new institutions such as the AIIB, provided that they “complement existing international financial institutions and that they share the international community’s strong commitment to genuine multilateral decision making and ever-improving lending standards and safeguards.”
In a commentary on his website this week, Summers said the past month “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”
“I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the U.S. to persuade dozens of its traditional allies, starting with Britain, to stay out of it,” wrote Summers, a former U.S. Treasury secretary and World Bank chief economist.
Postwar Summit
The World Bank and International Monetary Fund were conceived in 1944 at a summit in Bretton Woods, New Hampshire, to stabilize exchange rates and fund the post-war reconstruction of Europe.
The U.S. should undertake a “comprehensive review” of its approach to global economics in the wake of the incident, he said.
Kim said the influx of capital from new institutions should boost the World Bank’s goal of ending extreme poverty — defined as living on less than $1.25 per day — by 2030.
“We’ve got to think in a fundamentally different way about how we fund development in emerging markets,” he said. “It has to be one in which every possible source of development financing has to be put on the table.”
The World Bank, whose largest shareholder is the U.S., has $223 billion in subscribed capital. China is the third-biggest borrower from the World Bank’s main fund, with $1.6 billion in committed loans.
The Japan-led Asian Development Bank has $163 billion in subscribed capital. The AIIB is expected to start with $50 billion. China plans to establish the AIIB’s charter by the end of this year, which would open the door for it to start lending in 2016.
