The World Bank’s clients are leaving the building
The time has long past when the World Bank was able to tie political demands to loans for developing and emerging countries. Many emerging economies today have better access to capital markets. This has an impact on their choice of development bank. By Oliver Klaffke
“Many emerging countries don’t necessarily need the World Bank any more”, says Chris Humphrey from the Department of Political Science at the University of Zurich. “They won’t simply let the Bank dictate its conditions to them either, because they have become economically and financially stronger”. This new balance of power has weakened the role of the World Bank – set up in 1945 – in financing state development projects. This could be a chance for the other development banks. The backers of these other banks aren’t primarily the same Western industrialised nations that make up a two-thirds majority at the World Bank. Today, some development banks are supported jointly by the emerging countries themselves. “Debtor nations have a bigger influence on how these banks are run”, says Humphrey.
In the past, economists and political scientists have been occupied mostly with the conditions under which the World Bank has been prepared to give loans. In 1944 the international financial order for the post-War world was decided upon at a conference in Bretton Woods, a mountain resort in New Hampshire in the USA. The World Bank was given a fundamental role as the main development bank. However, it often linked loans to political demands. In a project headed by Katharina Michaelowa, Humphrey has been investigating which development banks are used by emerging countries to help fund their projects. Their research approach takes account of the economic and financial performance of many emerging countries – and this has improved greatly in the past decade. The public debt of emerging and developing countries was on average 40% of their GNP in 2010, but in ten years’ time it should only be 30%. Some 25 years ago, the share of the world’s foreign exchange reserves of non-OECD countries was only 30%; by 2010 it was already at 65%. It’s primarily countries in Latin America that have transformed themselves. In just over a decade, poor countries have turned into well-off, middle-income economies. It is hardly surprising that the World Bank and the International Monetary Fund are becoming less and less important as lenders. Countries such as Mexico, Indonesia, Turkey and China are less dependent on financing from the World Bank. China today is actually important in financing other countries, such as the USA. “Given the economic strength of the countries that want to borrow money, we can assume that they look very carefully at the conditions under which they can take out a loan”, says Humphrey. For the countries that are looking for loans, there’s more to it than just the interest rate at which they borrow money. As Michaelowa and Humphrey have ascertained, the length of time before the loan is actually paid also plays an important role, as do any bureaucratic difficulties or political aspects. This is why some development banks are rising in importance, because they take a different approach to their clients. Humphrey and Michaelowa have compared three development banks that are run in different ways. At the World Bank, the industrial nations are in charge. At the Development Bank of Latin America (CAF), however, the countries that take out the loans also call the shots. And in the Inter-American Development Bank (IADB), there is a balance of power between debtor and creditor nations.
Fewer cultural differences
The researchers found that the biggest difference between the banks lay in the hurdles they erected for countries wanting loans. At the World Bank, it takes between twelve and sixteen months for a loan to be approved. At the IADB, it takes seven to ten months, but at the CAF just three to six months. If the money is needed urgently, that process can even be reduced to one and a half months. “The differences are a result of the power relations within the development banks”, says Humphrey. The CAF is borne by countries that also belong to the debtor nations. They know that countries can need money quickly, and so they speed up the process. The World Bank and the IADB have a whole series of conditions to be met – from matters of environmental protection to social sustainability – whereas the CAF raises no such issues. It relies on countries keeping to their own laws.
At the World Bank, loan requests have to go through four different ‘country missions’ and four different committees, and the countries that have the say there are always making things harder. “One vice-president, who is responsible for Latin America, does not even speak Spanish”, said one of the people interviewed for the study. Cultural differences don’t make cooperation easier when the Latin American style – which relies on personal contacts – comes up against the North American and European style, which insists on a strict interpretation of the rules. At the IADB, on the other hand, almost 70% of the employees are from debtor nations. “The people there are culturally much closer to us”, said one interviewee from Chile.
The CAF is designed specifically to meet the needs of its clients. Loans of less than 20 million dollars can be granted by a vice-president, and up to 75 million dollars by an executive vice-president. “Our investigation has shown that our hypothesis is correct”, says Humphrey. “A development bank in which the borrowing countries are in the majority can offer conditions that are very favourable to them”. The results of this research project let us see how a development bank could be run so that it would be accepted by the debtor nations. This year, there are plans to open a development bank that will be run by the BRIC countries (Brazil, Russia, India and China). The importance of the emerging countries in financing development is obviously increasing.
Oliver Klaffke is a science and economics journalist.(From "Horizons" no. 103, December 2014)