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Why the World Bank’s efforts to marshal private capital won’t reduce poverty

World Bank President Jim Yong Kim is thinking about reinventing the organisation model. REUTERS/Yuri Gripas

The planned reinvention of the World Bank may be a mea culpa of sort from the multilateral funding institution. But it is still a bearer of bad news for poor African countries.

The World Bank is looking to migrate from the model that largely relies on member states providing loans for development projects, to one in which it becomes more of a broker of private capital to be invested in development projects.

The World Bank Group President Jim Yong Kim believes that a sizeable portion of private capital lies idle. With proper steps to eliminate unacceptable risks, this capital can be channelled into funding development in poor countries.

Private investors are generally risk-averse. This means that mountains of idle cash remain largely untapped at the expense of real investments. These could generate jobs and green energy as well as reduce poverty, improve health care and extinguish debts that are haunting countries the world over.

Kim argues that development finance needs fundamentally to change in speed and scale, growing from billions of dollars in development aid to trillions in investment.

As Felix Stein from the University of Cambridge and Devi Sridhar from the University of Edinburgh point out, Kim now believes that there are significant financial resources readily available and sitting on the sidelines of capital markets. They generate little in the way of returns, particularly compared to what they could make if invested in developing countries. Private investors lack knowledge about these countries, and their tendency to remain generally risk-averse means that the funds remain largely untapped.

Kim’s argument amounts to an admission that the Bretton Woods system has failed to address gaps in the global capital markets. And that its institutions – the International Monetary Fund and the World Bank – which were established after the second world war to foster international economic cooperation – have failed to support the world’s developmental needs.

But private sector funding won’t help the situation because the much needed developmental investments in Africa are social in nature. Private investments will also be costly, and as a consequence, exploitative.

Weaknesses in Bretton Woods institutions

The Bretton Woods multilateral institutions have been strongly criticised for their corporate led model, which tends to undermine social justice. Over the years they have been focusing on profit oriented investments. Many have impoverished people in emerging economies, particularly in Asia and Africa through displacements, large scale privatisation, natural resource looting and environmental degradation.

Aid and loans from the World Bank and the International Monetary Fund usually come with strict conditions and restrictive policy recommendations. These take away the economic freedom of aid recipients and borrowing countries. They include strict inflation controls, high taxation, large scale privatisations, rapid trade liberalisation and cutting government expenditure on social services.

Conditions on aid and loans usually forfeit states’ authority in governing their own economy, as national economic policies are predetermined under the loan packages. This ultimately shifts regulation of national economies from state governments to the Washington institution in which African developing countries hold little voting power.

The number of emerging countries depending on the World Bank funding has drastically declined over the past ten years. This has been mainly due to increasingly attractive alternative sources of financing. The bank has been rendered irrelevant as private capital flows to the developing world have grown on the back of governments issuing sovereign bonds. Its role has gradually become a mere aid agency dealing with a smaller group of low-income fragile states,

The new generation of institutions spearheaded by emerging market governments led by China is further threatening the traditional multilateral institutions.

This is what lies behind the World Bank’s efforts to reposition itself from being a lender for major development projects relying on funding states, into a broker for private sector investment. This would shift it from being a body that disburses development aid to one that mobilises investment.

But the World Bank’s proposed repositioning will have a number of negative implications on countries in Africa.

Negative consequences

First, it will further disadvantage developing nations as most investments in Africa are classified as risky. This means that most investors are unwilling to commit funds for longer time frames. And, given the high risk assessment, borrowing will be expensive. This in turn will push countries further in debt and expose them to exploitation by private lenders.

Second, the repositioning from public to private funding will further cement the World Bank’s business model at the expense of social benefit. This will undermine the role of the state as the primary provider of essential goods and services, such as health care and education.

Last, it will be almost impossible for the bank successfully to mediate between the interests of a global markets system, developing country governments, and people in poverty. This is because projects attractive for private investment are out of the reach of poor people.

There’s no reason to believe that the bank’s envisaged new role will lead to a reduction in poverty. The more likely outcome will be that it once again fails to address international capital market shortcomings.

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