Ajay Banga, the newly-appointed President of the World Bank, is taking the helm at a pivotal moment. The devastating effects of the Covid-19 pandemic have impeded progress in developing countries and pushed 124 million people into extreme poverty.
And Russia-Ukraine war, which has exacerbated inflation and US-China tensions, promises to trigger even more volatility. Consequently, the Bank projects that economic activity in emerging economies will not return to pre-pandemic levels by 2024.
Low- and middle-income countries need the World Bank to spearhead global efforts to reduce extreme poverty and enhance living standards. By helping them to reduce their debt burdens and combat climate change, the Bank could also help to improve their air and water quality, increase their access to clean energy, and bolster their food security.
But scepticism about the Bank’s capacity to address the challenges facing developing countries is running high. In a recent speech, Banga said that the World Bank needs a “new playbook” for engaging with the developing world.
While this is undoubtedly true, any updated strategy must acknowledge a fundamental truth: the Bank is unlikely to have enough capital to finance the investments required to address the enormous challenges facing poor countries.
Given this, it must mobilise its knowledge and relationships, as well as its capital, to encourage investments that enhance growth and employment while also facilitating the green transition.
World Bank needs complete transparency
That means establishing itself as its stakeholders’ partner of choice. By collaborating with policymakers in developing and developed countries, other multilateral development banks, and the private sector, the World Bank could incentivise what Banga has called “informed risk-taking.”
This approach would enable the Bank to use its limited balance sheet to encourage private, public, bilateral, and multilateral lenders to increase their annual investments in sustainable development from “billions to trillions” of dollars. But first, Banga must guide the institution toward complete transparency.
Fostering transparency starts with acknowledging the obvious. The debt crisis currently engulfing emerging economies was exacerbated by the pandemic, but these countries were on a perilous path long before.
Today’s debt conundrum is the result of borrowers and lenders — including the Bank itself — pursuing low-return projects that could not cover their costs. To avert future debt crises, multilateral institutions must stop financing economically unsustainable projects.
While technical discussions about how to generate additional financing are crucial, they must not distract the Bank from the vital task of collaborating with decision-makers in developing countries. Identifying future investments that could boost growth and accelerate the energy transition would be far more beneficial.
The first step toward a more effective World Bank has already been taken by the Bank’s partners during the recent Paris Summit for a New Global Financing Pact.
With roughly 1.2 billion people in poor countries lacking access to electricity and another billion living more than a mile from an all-season road, infrastructure investments could foster sustained growth, help reduce debt, and mitigate the effects of climate change.
Financial and human resources
Given that two billion people in emerging and developing economies are expected to migrate from rural to urban regions by 2030, it is crucial to build climate-friendly power plants, roads, and railways in these countries.
The Bank’s technical teams, working closely with other multilateral lenders, must estimate the additional output that each dollar invested in such projects could generate. For example, consider a project that contributes 30 cents to GDP for every dollar of investment, resulting in a 30% rate of return. For such a project to be deemed economically viable, the borrowing cost would need to remain below 30%.
As the Bank increasingly evaluates partner project proposals based on expected returns, it will likely encounter pushback against climate-related projects whose benefits cannot be captured by GDP alone. While the Bank’s assessment process should emphasise that many climate projects can deliver high rates of return, it is crucial to recognise that there are valid reasons to invest in projects that may not yield short-term economic benefits. At the same time, to mitigate risks to debt sustainability, economic and non-economic investments must be carefully balanced.
To this end, the Bank should adopt a two-tiered assessment process. The first tier would comprise projects approved solely on the basis of projected returns, and the second tier would include projects whose anticipated environmental benefits outweigh their cost. Projects approved on the basis of economic merit could be further divided into two groups: high-return projects that could attract private-sector financing and lower-return projects that require concessional funding.
The Bank has the financial and human resources to implement a data-driven investment approach. But to succeed, it must produce estimates of expected returns on prospective projects, ensure that estimates are independently reviewed and verified, and make this information freely accessible to governments, investors, and the general public.
Publishing this data would enable governments to identify infrastructure projects with the greatest potential to boost growth, help private investors make informed financing decisions, and allow civil-society groups to hold leaders to account.
By cultivating a culture of transparency regarding the costs and benefits of the Bank’s investments, Banga could boost its credibility. Increased trust would encourage shareholders to consider capital increases, and engagement with the private sector and other development institutions would generate scale and momentum.
To be sure, changing the World Bank’s culture will not be easy. But many people around the world have been waiting for such an effort, and they would likely support Banga in transforming a lethargic institution into a powerful force promoting a just and sustainable future.
Bertrand Badré, a former managing director of the World Bank. Peter Blair Henry is the author of Turnaround: Third World Lessons for First World Growth