Bill Rhodes:
Well, first of all, it's great to have you here, David. David is an old friend. We worked together on the Latin American debt crisis when he was a young guy in the Treasury, and we've known each other ever since.
One of the things I want to say about David to all of you, and to all of those who are listening in here, David took over the job ahead of the World Bank in the most difficult position of anyone in the history of the World Bank, because immediately after he got in, COVID, hit. Then followed by COVID, as we all know, the war in the Ukraine, which we just heard Kristalina talk about. I can't think of a job that was more difficult to have.
And interspersed in all of this was another sovereign debt crisis. And this one may prove more serious than the Latin American debt crisis. David's an expert in this area. But first of all, David, I would like to thank you for your work in support of Bretton Woods over the years, before you get into a little bit. Specifically on the first question, what I'd like to do is to ask you your view of the world economy? How do you think we've survived on COVID, the war in Ukraine, which is unfortunately still unfolding, and what's facing us now?
In the words of many a well-known economist is there ‘stagflation’, or even recession, in the major world economies, not to talk about the problems in the developing world? So that would be my first question for you.
David Malpass:
Thank you so much, Bill. It's really a pleasure to be here with you. I'm glad the Bretton Woods Committee could lure you to Washington for a meeting. That's just fabulous. It's great to see Bill Dudley and John Lipsky, who were the toughest competitors in Wall Street. We're doing similar issues, you know: global economy and finance are so important to billions of people around the world.
I'm troubled by the current environment. I'll explain that we went through a long period of, I think, artificially low interest rates. At 0% there's not really an economic theory, or theory of finance that can explain why that existed. Capital flowed based on that decision of 0% interest rates. At the same time, advanced economy governments were really ballooning their national debts, and the central banks were buying duration. That's the first time in history that it was done, and it wasn't small. It was huge.
Today, the Federal Reserve has some $9 trillion in bonds. The European Central Bank has some $8 trillion of bonds, and Bank of Japan the same, and that fundamentally alters capital flows around the world. That means that it's going to take some years to adjust to more neutral interest rates. You can call it bringing down inflation, but it's really allocating the change in the interest rate environment for developing countries. That's particularly tough because there's the brunt of the higher interest rates, but also the shortage of capital that they're faced with.
As we look at the global economy, the advanced countries are going to take almost all the capital as part of paying the interest on the national debt, refunding the national debt. You know, sometimes people say, national debt doesn't cost because you just pay the interest on it. That's not correct at all. At the time that you borrow the money, if I borrow a trillion dollars, I don't get to borrow those trillion dollars again. That's a one-time choice. The world made this choice over the last 10 years, a huge increment in national debts in the advanced economies, and you'll never get to do that again. That means there has to be an added effort over the next five years or 10 years to come up with investment in good projects, good countries, good innovations. I think that's going to be a big challenge.
You can't achieve that simply by lowering interest rates back down. If you do that you end up embedding the inflation into the system, which hurts the poor the most. You have to find a path forward, where you end up stabilizing the situation and then allowing new capital to flow to better investments over a period of years. For developing countries, this is a hugely challenging time, though. And the World Bank tries. We've had a big expansion of our commitments and of our exposure during the two crises -- COVID and now this inflation crisis that we're in -- but that's not nearly enough.
One estimate by us is that developing countries need $2.4 trillion per year just for global public goods. That's not the development, that doesn't even suffice or begin to touch the development needs in terms of education, in terms of fertilizer, farms, environment, agriculture activity, and so we're in what I think is a pretty deep hole. Now, how do you get out of it? You make as good a policy as you can, starting tomorrow. I gave my speech two weeks ago in Niger, the Positioning Speech of the World Bank, and that is a chance to really give an in-depth speech, and I made the point that governments have to think in terms of fiscal responsibility, monetary policy. That's separate from fiscal policy, not overlapping currencies that can be stable because of the underlying sound policies, trade policies and private sector policies that are that are growth oriented. And they have to do it urgently now because it's not a forgiving environment in the world.
Long answer, but that's where we stand. Our forecasts show the risk that we're in. We're in a period that will be a long period of slow growth for the world.
Bill Rhodes:
I know that's something that concerns me a lot. I asked you about stagflation because this is one of the bugaboos that people have tended to forget about over the years that's out there. How do you view the work of the World Bank in the area of developing a framework that really functions—because you very correctly have been very critical of the original framework because it hasn't really worked.
And I know you and Kristalina have worked very hard to make it work. But it just hasn't worked. What do you see as the role of China because we all remember that in 2008, the world avoided a great depression and only had a great recession because China pumped in anywhere from100 billion to a trillion dollars of finance internally and externally, in the sense of development. And today they are the largest creditor nation to the developing world, starting with Belt and Road, but there have been real differences in the willingness of China to cooperate with the Paris Club, and with other sovereign creditor nations in this area. Do you see progress in this area? Because without China, the world's second largest economy and the largest creditor nation to the developing world, things are not going to move.
And you know, we in the private sector take a look at this because we need to be working in this area. Bretton Woods, as a matter of fact, is working on its third paper, this one on the role of the private sector and burden sharing, which will be coming out in the coming weeks, and we have a panel later on to talk about this. And one of the areas that keeps popping up is what's going to happen to make the framework really happen. And the other thing is the role of China, again, which is key.
David Malpass:
That’s great and thank you to the Bretton Woods committee for raising detailed topics. Bill Rhodes is a world expert in the details of how you get to restructuring. Bill was singularly important in the Latin debt crisis of 1986, ’87, ‘88, ‘89 and working its way through in the world. He had subsequently and prior solved multiple crises. And it's concerning to hear him say that our current environment might be worse or as challenging as the Latin debt crisis.
What we now have is a situation where the creditors are across a broad spectrum. There's been a fundamental change in the composition of the creditors, meaning China has become a big creditor, but Eurobonds are a new entry that didn't exist before. As we look for mechanisms to achieve restructuring, what we are trying to do is encourage the world to recognize that there needs to be a timeline for that.
It's really important for investors to have more predictability in terms of a restructuring. They're willing to invest in something that's risky if there's a process that will allocate losses, and that gets to comparability of treatment, or burden sharing that's fair among the creditors. So that's the process that we're working towards. I'll co-chair with Kristalina tomorrow the Global Sovereign Roundtable on Debt. I'm trying to broaden the participation in the debt restructuring talks to include the debtors and to include all of the creditors including the private sector, and to do earlier sharing of information.
The historical, traditional process that is done for restructurings is that a small group of official creditors, that doesn't include China, decides on a confidential basis what the restructuring will look like. And then, only after they've decided, shares it with the data and with the private sector. I think we have to have a more inclusive process in order to really get to an answer. Now we're at the stage where we've had regular conversations with China and let me describe the positive side: this is a win- win. One part is the amounts at stake are not large for the creditors, and especially not for China. Zambia, surely, can't be restructuring that debt and can't be a financial burden for China. It is a process burden, so we should recognize that, but then also recognize the huge benefit to China from resolving this because they can find growing markets around the world.
As we think about debt restructuring processes historically, it’s better to get them done and then to move on to the next stage of growth. I went to China in December and we had good conversations and Kristalina was there. In recent weeks, Axel van Trotsenburg, World Bank Group Senior Managing Director had concrete conversations to try to move the process along and we think there's some progress in that.
But as we look at this week, we'd like to see progress for Ghana, that there be a creditor’s committee. There hasn't been a creditor’s committee for Ghana and we'd like that. We'd like to see for Ethiopia a wedding of structural reforms with an IMF program that allows them to get to a debt rescheduling that would be beneficial to them and to the creditors. And in Zambia, we're at the point where there needs to be a memorandum of understanding.
All that means, and you probably invented the concept, get the creditors to write down what it is that they're intending to do under a burden sharing framework within the restructuring. Until that's written down, no one knows what they're agreeing to. They're there at that point. And there's an urgency to getting this done because in the meantime, the World Bank has been putting money in net flows into Zambia, into Ethiopia, into Ghana as we help them move toward a debt restructuring. But there are limits to the amount that can be put in in the absence of a sustainable outcome.
We're at the point where we need to see the sustainable outcome in order to offer and put in fresh funding to make these deals work. It's a practical step. China's important in it because in many of the cases they are the major creditor, or at least a major creditor, and are now sitting on the creditors committees, which is useful. They've broadened their role and shown leadership in that. So we welcome that and we're ready for the next step.
Bill Rhodes:
Well, I'm glad you brought up the idea of the creditor committees because that was one of our recommendations in our last report from Bretton Woods on transparency. And I just had a visit a couple of days ago from the deputy prime minister of Korea who remembers well that we did the restructuring, the creditor committee, and they were about to go into default and people were giving up on Korea, but look where Korea is today: one of the best-run economies in the world. So it can happen if people can really decide and try and work together.
Where do you see the whole system of multilateral development banks going -- not just the World Bank and the IMF-- but all of the other regional development banks? There has been a lot of concern that there hasn't been good, coordinated action among all of you. I know between the IMF and the World Bank there has been, but with a lot of the regional development banks there are real questions.
You have the Asian Infrastructure Investment Bank, run out of China and Shanghai, the Asian Development Bank, the Inter-American Development Bank, the African Development Bank, the Caribbean Development Bank, etc. But you don't always seem to be on the same wavelength. And of course, you have the European Bank for Reconstruction and Development in London, which will have to play a key role in whatever happens in the reconstruction of the Ukraine whenever that can begin. One of the concerns people have is that you're not working, all of you, as close as the IMF and World Bank work.
David Malpass
There's a lot more core coordination than people know. For example, the credit risk officers meet regularly, the CFOs meet regularly. I just met with President Jin of the Asian Infrastructure Investment Bank, and we have a formal meeting of the group on Saturday of the multilateral development banks, and Kristalina is welcome. I'd say there actually is more coordination than people are maybe aware of or want to give credit for.
But the challenge we should note is the governance structures of each of these are dramatically different. For example, we rotate the head of the Coordination Group year by year. Right now the head of it is the New Development Bank – that's the bank of Brazil and of Russia and of China -- they're going to be the chair of our meeting on Saturday to discuss what to do about MDB coordination on climate and on other issues. It's not as easy as people think to form coordination. They all have different capital structures, different borrowing capabilities. EBRD, which you mentioned, is a private sector bank so it's the equivalent and the sister of the International Finance Corporation, which is part of the World Bank. I'm president of it, but their coordination at the private sector level is quite different than the other parts of the multilateral development banks.
And now, one thing that does create commonality among them, is the need for concessional resources. Now, that's not something that donors want to hear. They say, “Wait a minute, we just put in, you know... I worked hard on IDA 19 and 20.” These are the giant three-year replenishments of the World Bank and we had a very successful expansion of concessional resources there and we're grateful to the donors. But even in nominal terms, the resources from the donor countries have been flat in nominal terms. And so the way that IDA has been growing is by rapidly increasing leverage. IDA now issues bonds in international markets, which gives it leveraging power that's unique in the world.
So, as we look at the MDBs, the World Bank is leading on a number of issues. For example, the Paris Alignment issue, which is very challenging for MDBs and for private sector financial institutions the World Bank is out front. We have published papers on what Paris Alignment means for our portfolio and for our new lending capacity. I think it’s not so helpful in the world to have competition among the MDBs to see who can have the highest target for climate finance, for example. That's been an issue. The EBRD has managed to have a 50% climate financing target because much of its financing goes into Western Europe. You're comparing apples to oranges. Our board considered the targets for climate financing over the last three or four months in detail, many meetings, and within their discussions they reaffirmed the idea of a 35% target because of the huge importance of poverty reduction, of child nutrition, of education, of health. As they looked at the various needs of the countries that are the primary clients of the World Bank Group, there was an explicit decision to maintain what we've achieved in terms of climate targets. These are huge amounts that the World Bank is putting out in terms of climate. I'm going to be interested to see on Saturday, how the New Development Bank—that's the Shanghai-based Bank of Russia and China, and Brazil is a key part of that—how it really interacts with the Paris alignment challenges that are so pressing on the MDBs.
Bill Rhodes:
Hopefully President Jin, who was at the World Bank, will live up to your expectations.
David Malpass:
He told me just this afternoon that 40 years ago he was at the Bank.
Bill Rhodes:
One of the things I wanted to ask you about is: a lot of people have been critical, and you got into some of it, because you're working on IDA and other areas of the World Bank on climate change. But as you know, there's been a lot of criticism in the press articles that the World Bank has not done enough in the area of climate change. Do you think this is a fair statement? Or do you think that people just don't understand what you're doing and what you're trying to do? And the World Bank?
David Malpass:
Well, I think the latter: that there's not a full understanding of what the Bank is doing. But there's also frustration in the world—and a little bit understandable—that as people prioritize climate change as an issue, the actual progress being made through projects is not adding up to the total. As you're looking at greenhouse gas emissions in the world, they are going up, not down. And the prospects are that it’s very difficult to get emissions to go down because the big emitters are actually adding to their output of greenhouse gas emissions. This creates a giant challenge for the world, one that's frustrating.
Then the World Bank comes into play. The World Bank is the largest by far of the international financial institutions—more than 50% of the total of all those institutions that you named. We achieved some $32 billion in climate financing. And over the last two-three years—2020-22—we did $100 billion of financing in global public goods. That's a big chunk of what the world is doing.
Now, granted there are voices for it to be even more and there's a balancing of that with all the other programs that the World Bank does. I mentioned it, but I'll dwell on the education challenge that developing countries face. The numbers are devastating: the number of kids that have gone backwards during COVID because of the school closures and the expenditures needed in order to regain literacy, especially for girls, to regain numeracy so that kids can have a chance at jobs into the future.
That discussion is robust within the World Bank Board. There's a big group—in fact, representing 100 countries within the World Bank Board—that has looked at this and said, “Find a balance”. They say to the world, “We've got to find a balance in tackling climate change costs.”
That means adaptation is very important for the developing countries. So can we have that balance? The World Bank is doing 75%—fully three quarters—of the adaptation spending. And I hope impact that's going on in the world from the international financial institutions. That's by far the lion's share of the world input on that.
I think the staff of the World Bank have been working massively hard through COVID, through the disruptions of the Afghanistan evacuation—which was a huge disruption, very dangerous for the World Bank staff because of the suddenness.
So, as we look at it, we've created this new diagnostic—the CCDRs that are Country Climate Development Reports. They've been hugely well received by the whole global community which has been saying “finally someone writes down in some detail”—these 100-page kind of reports, I've tried to keep them as short as we can so that they're usable by people—and they give the pathway forward for the countries on their climate costs. What is Vietnam going to do to actually have spending for adaptation in the Mekong Delta—a dangerous place for people—as well as spending for mitigation. What are the best ways for the countries to do that? So these are well received. They're a big effort by the World Bank internally: a big chunk of our budget is going to creating new information for the world on this important topic.
Bill Rhodes:
I think it's very important that people in the audience and people in general understand that. We always run out of time, but I have a couple of other questions I'd like to get to before we break up.
One is this whole area of corruption. Jim Wolfensohn felt that this was an area—when he ran the World Bank—that was really underestimated. And we've seen a rise in this given all the funds that went out in COVID and not just in the developing world— in the developed world. Where do you see the role of the World Bank in fighting corruption as part of your lending process to the various countries in developing world?
David Malpass:
I’ll make several quick points. I spoke recently at Transparency International here in DC and I laid out in this speech what I've tried to do in my presidency—I was four years as of two days ago. I'm through the four-year mark, and it's been a very busy time, productive time for me, for the Bank, and I'm proud of that.
I spoke at Transparency International and laid out some things. One thing we've done is we tried to really strengthen the Governance Practice within the World Bank—it had allowed itself not to be very active. Arturo Herrera, the former Finance Minister of Mexico, is now the Director and doing a good job in in re-expanding that area.
A core challenge is with governments themselves. If you look at dual exchange rates, for example, it's a recipe to take money out of the country. So we're actively fighting dual exchange rates: that's where the country has an official exchange rate and then there's a rate that's used by most people. Those that get the official exchange rate, are getting basically a gift from the government for their imports or for their activities. That's a challenge. It's one that countries are reluctant to give up because there are people in the elite that benefit.
That's true also of trade policy and investment policy: if I protect a certain part of an economy, it gives a benefit to those who received that protection. I would say, in general, we are pushing hard across the board on transparency and it's good Bretton Woods Committee has been a leader in that effort.
Transparency is a pervasive problem. We really want contracts to be disclosed: that's the starting point for an anti-corruption drive.
Let me make a little aside and I know you've got more. Very challenging for developing countries is correspondent banking, AML-CFT considerations—that’s anti-money laundering and counterterrorism finance. One of the big challenges that's been happening in developing countries is they're being closed out of world financial markets. Then they may resort to corruption.
What we've tried to do to address that is through IFC. When I came in, I found to my surprise that IFC was not giving itself full credit for a powerful tool that they have which is trade finance. You know the importance of daily transactions for companies. They can't live without it; the commercial banks have pulled out of that market.
So IFC stepped in. We have tripled our trade finance. Also, we now give credit for that in our financial statements. They haven't been really disclosing or keeping track because it was a revolver. It was short term financing. That's almost more important for companies than the long-term financing. We've really beefed up that area which helps, I think, on corruption because legitimate businesspeople can get trade finance without having to go through a middleman in their country.
Bill Rhodes:
I think it's very important. Of course, we have in the audience someone you know well—Frank Fogle, who is one of the founders of Transparency International.
One of the other points I would like to ask you before we run out of time, is that as you move on in life—and you spent a tough four years, as you mentioned, trying to improve the World Bank and all of these areas—what advice would you give to your successor coming into the job?
David Malpass:
Some of it is straightforward: people are important.
The World Bank is really well positioned for having an impact, but that gets into the details. The details matter and that means the quality of lending is a really important aspect of the World Bank. I think the World Bank structure works well. The implementation is a giant challenge.
I just met with the Finance Minister of Tanzania. They've done really well. I met with Jamaica today. They've done really well. And part of that is because they actually follow through with the implementation of projects. We work with countries all the time to say “okay, we know you want it to do this and you're now in a position where you can do. Do you have a minister assigned? Do you have meetings that are regular enough to get the job done?” People don't want to do this sometimes.
I'm sorry, I'm moving away from my successor—it's just good management style to listen to people within the organization.
I was heavily involved in the capital increase of the World Bank in 1987, in the creation of MIGA, in the creation of the environment division at the World Bank. I testified frequently to Congress and then in the recent administration I led the effort on the capital increase in 2018 for IBRD. It means that the World Bank is in this position where it's well capitalized with two very large item replenishments but with the full recognition that the resources needed by the world.
I gave you that $2.4 trillion number just for global public goods. And the World Bank has done $100 billion over three years, which was way up from previous incidents. It's really tripling the size of the World Bank's effort in these areas. But that shows you the magnitude of the challenge that the developing countries face. I'm encouraging them—and will today to this group—to recognize that the global environment is not friendly to investment in riskier operations with the shift in duration that the world owns. As interest rates go up, that's going to make it very hard to get capital into the spots where you want to get. The countries have to take it upon themselves to triple their efforts, to attract investors, and to grow faster so that money can come in and so they have enough money for education and for climate, as we were discussing.
Bill Rhodes:
I have one more question David, I want to ask you.
We have the situation with the Ukraine, which reminds a number of us what happened in post-war Europe and post-war Japan. What do you see the role of the World Bank and in trying to look forward, to try and do something like a World Bank effort that was made around then? That was the formation of the World Bank. At that particular time, John McCloy worked very hard on that. Do you see the major role by the World Bank in trying to put together something like this? How do you think this could happen? In a few short words, because they said they're already trying to recap. And when you and I get going, we go for a long time.
David Malpass:
In the post-World War II reconstruction efforts, the Bank could really affect billion-dollar loans to France to Luxembourg. And these were critical in the rebuilding of their steel industries in some of their key industries. I think, in Ukraine the Bank is positioned to do that. But the size is daunting: when World Bank does the damage assessments, they run in the 400 billion range. The World Bank’s total commitments last year were $75 billion, which is huge for the World Bank: that's up 50% from the average. It's a big surge to get to 75 for all the countries.
So there has to be thinking about the international institutions. I think also the European Union has been created and the European Commission, and they have large funding that can be brought to bear in Ukraine. We're in the middle of that. Anna Bjerde, who has been our Vice President for that region, did a great job. She's now Managing Director for Operations of the Bank. The Bank is left with really strong people that are deeply engaged in leading the effort for the transmittal of current funding.
We have a big meeting tomorrow. President Zelensky will be there, and the Prime Minister and the Finance Minister will be there. We will talk about these issues, and the Bank is prepared to play its role in the reconstruction.
But I do need to set the expectations for the world that the amounts needed to rebuild the electricity sector, road sector, or railroad sector are way bigger relative to size of the balance sheets of the international financial institutions. So there has to be country money from Western Europe that would come in to help with that effort.
Bill Rhodes:
I want to thank you, first of all, for your service as head of the World Bank in the most difficult time. But also people forget that when you were Undersecretary International Treasurer in the previous administration, you worked very hard to get financial support for the World Bank and the IMF. So I'd like to thank you for both of those, David, and also for being a good friend of all of us here at Bretton Woods.
David Malpass:
Thank you, Bill. Thanks, everybody.
