The Changing Nature of Multilateralism:
the Role of the World Bank
Richard Newfarmer
Special Representative to the WTO and UN
World Bank
Geneva, Switzerland
November 24, 2009
Multilateral system is changing rapidly…

Inexorable long term trends are increasing the economic power
of developing countries…

…and the challenges of globalization require collective
multilateral response… and the problems of today’s world
cannot be solved without their participation

One example: the financial crisis can only be met with a
multilateral response

The World Bank is responding… and changing in the process
Globalization and growth are increasing the role of
developing countries, especially the BRIICS…
Exports from developing and developed countries, 1980-2030
US$ billion
25
$23 trln
20
23%
15
18%
22%
BRIICs
Other Developing
countries
21%
10
13%
20%
5
5%
19%
76%
0
1980
Source: World Bank simulations with Linkage model.
High-income
countries
67%
61%
55%
2005
2015
2030
China, India, and other developing countries will become
centers of global demand over the next quarter century
GDP at PPP exchange rates
US$ trillion
45
40
35
30
Other developing
countries
China
25
20
USA
15
EU
10
India
Russia
5
0
2001
2005
Source: World Bank simulations with Linkage model.
2010
2015
2020
2025
Brazil
Indonesia
South
Africa
2030
…and the share of developing countries in global output
will rise…
US$ trln
160
---GDP at Market Prices----
-----GDP in PPP------
140
120
100
48%
$66 tn.
80
60
10%
13%
40
22%
18%
20
BRICs
23%
Other Developing
countries
27%
20%
High-income
countries
52%
30%
2005
2030
0
2005
2030
Source: World Bank simulations with Linkage model.
A key driver is rapid diffusion of technology and
knowledge…
Millions of internet users
700
600
500
400
High income
300
BRIICS
200
100
Other Low &
middle income
0
1
9
19
3
9
19
5
9
19
Source: World Bank, Global Economic Prospects (2008)
7
9
19
9
9
19
1
0
20
3
0
20
5
0
20
Globalization will portend huge stresses as economies
integrate into the world economy…

Distribution of benefits will be uneven…hence need for development
assistance

Increased trade and financial flows increases policy spillovers with potential
beggar thy neighbor effects – hence the need for new disciplines and
Because of global integration makes countries
learning about policies that work (policy convergence)

inter-dependent, global problems require
Environmental
pressures
will become severe
hence needs for concerted
multilateral
solutions…
with –increasing
multilateral action to protect the global commons
participation of developing countries

Migration and cross-border movement of people spread infectious diseases
– hence need for coordinated health response

Disruptions in some globalized markets could become more common -labor markets, food and energy, and financial – hence needs for collective
responses
One example: Responding to the financial crisis and Great
Recession

Successive waves of financial deregulation in the US
One example: Responding to the financial crisis and Great
Recession

Successive waves of financial deregulation in the US

Expansion of opaque financial innovation
 Subprime mortgages
 Home equity lending
 Consolidated Debt Obligations
 Credit Default Swaps

Emergence of unregulated borrowing in the shadow banking system
 Mortgage companies
 Investment banks
 Hedge funds

…leading to excessive leverage of consumers, corporates, and public sectors
Excessively easy money after 2001
Fiscal stimulus as US budget swung from surplus to large deficit
…financed by China and other countries accumulating large reserves



The bubble bursts… financial panic… and the Great
Recession
MSCI equity price indexes, January 2005=100
Emerging markets
So…
30% of household wealth wiped out
$4 trillion of equity worldwide
Euro Area
Pension funds obliterated
Unprecidented contraction in consumption
USA
Sept-2008
Source: World Bank, Global Economic Prospects, 2009
The crisis required a multilateral response… and the G20
leaders strive to coordinate actions…

G20 Summits
Nov. 15
April 2
Sept 23
Fighting this Crisis
• Global fiscal stimulus
• Coordinated monetary policy
• Restraining protectionism
• Enhanced IMF resources
Preventing the Next One
• Managing systemic risk
• Oversight of credit rating agencies
• Enhanced disclosure/common accounting
Reflecting New Realities/Enhancing Legitimacy
• G-20 supersedes G-8…?
• Developing countries in Global Stability Forum
• Reforms of the IMF and WB
Liquidity in global inter-bank markets have virtually
returned to normal conditions
LIBOR-OIS spread, key policy and regulatory responses
Oct G-7
meeting
Precrisis
USD
average
Source: World Bank, DEC Prospects Group
dollar
euro
Equity markets have recouped between a third and a
half of their losses…
MSCI indices of EM Asia, EM Europe, Latin America and Mature
Markets (Jan 1, 2007=100)
Source: World Bank, DEC Prospects Group
Trade, devastated in early phases, is a leading sector out
Export volumes, seasonally adjusted, annual percentage change
(rolling quarterly average over previous quarter)
Source: World Bank
Industrial production has turned around
Industrial production, percentage change (3m/3m, saar)
Developing
OECD
Source: World Bank, DEC Prospects Group.
World
Recovery is beginning… with developing countries leading
% change
GDP annual growth rates (%)
Forecast
7
Developing countries
JPM: 5.8
4.4
5
JPM: 2.7
3
1.6
High-income countries
1
-1
-3
2000
2001
2002
2003
2004
2005
2006
2007
?
2008
2009
2010
But damage is severe – and it may take years to regain lost output
(Reinhart-Rogoff, 2009; Cecchetti, et al 2009)
Source: World Bank, Global Economic Prospects, 2009, GEP Update, 2009, and JP Morgan
Repairing the damage: Policy issues

Providing adequate support to unemployed workers – and to the poor will
be crucial
 ILO: 40-60 million more workers will be unemployed in 2009 than in
2007
 Employment usually takes twice as long to recover as output (Reinhart
and Rogoff, 2002) (Claessens, et al, 2008)

Maintaining open markets during periods of high unemployment will be
critical to sustaining trade-led growth

Reallocating global balances and managing exchange rate realignment
requires continued (and better) G20 coordination

Financing widening fiscal deficits – necessary to maintain health and social
spending -- could prove difficult problematic
Financing fiscal stimulus programs will pose serious
challenges -- as will unwinding deficits in out-years
Source: Consensus Forecast, October 2009
Note: The data represent the key budget balance, which differs across countries. For example, for Argentina, the balance refers to the consolidated non-financial public sector
budget; for Brazil, it refers to the nominal public sector borrowing requirements while for Chile, it represents the general government budget balance.
…global borrowing from private markets is still
expensive… and may remain so for some time
Emerging-market bond spreads
Before Lehman Brother
Source: World Bank
What is the role of the World Bank in the crisis- and in the
multilateral system of governance?
In the beginning…
• born after World War II as the
International Bank for
Reconstruction and
Development
•
to help countries reconstruct
after the war -- focus on
infrastructure and industry
•
part of the extended UN family, but
separate governance structure
•
owned by 185 countries with votes
according to paid in capital
• US
largest shareholder (16%)
• Japan
• 25
now second largest (15%)
Executive Directors
The World Bank’s role…

Provide financial resources for investment
 directly through loans
 indirectly – guarantees and insurance

Provide knowledge about what works in poverty
reduction and what doesn’t
 through policy advice
 technical assistance
 bringing people together

Provide “public goods”
 Data and comparative indicators of policy
(trade, finance, doing business, debt)
 Research into what works and what doesn’t
 Advocacy of global policies that affect poor
 Global environmental work and infectious
diseases
The World Bank Group comprises five organizations
with differing instruments…
THE WORLD BANK GROUP
International Bank
for Reconstruction
and Development (IBRD)
•
Supports middleincome countries
•
Provides loans at
AAA terms plus
cost spread
•
Funded through
bonds, backed by
shareholder
capital
International
Development
Association (IDA)
•
Supports the
world’s poorest
countries
•
Provides softloans and grants
plus debt relief
•
Replenished
every 3 years by
donors and
through IBRD
income
International
Finance
Corporation (IFC)
Multilateral
Investment
Guarantee Agency
•
Supports the
private sector in
developing
countries
•
Supports
investors in
developing
countries
•
Provides loans
and equity
investments
•
Provides political
risk insurance
•
Backed by
shareholder
capital
•
Funded through
bonds, backed by
shareholder
capital
International Center
for the Settlement of
Investment Disputes
•
Offers mediation
and arbitration
services for
investors in
developing
countries
The World Bank is deploying various instruments to
respond to the crisis

IBRD: commitments of $100 billion over the next three years

IDA: Front load commitments from US$42 billion

IFC: about $30 billion over the next three years


Expanded trade finance program from $1.5 billion to $3.0 billion over a
three years to benefit participating banks based in 66 countries

Bank Recapitalization Fund to recapitalize distressed banks for US$1
billion over three years ; Japan has invested US$2 billion to the fund.

Infrastructure Crisis Facility is to provide roll-over financing and help
recapitalize existing, viable, privately-funded infrastructure projects
facing financial distress with investments of US$300 million to mobilize
between US$1.5 billion and US$10 billion from other sources.
Multilateral Investment Guarantee Agency planned support to projects in
Ukraine, Russia, and Eastern Europe, and Africa.
World Bank Group reforms for the 21st Century

Structural reforms of the World Bank Group:





Strengthening the financial resource base of the World Bank Group to
address IBRD/IFC capital constraints:





Voice and participation, voting power of developing countries
Governing bodies
Leadership selection
Management accountability
August 2009 load price increase, generating $2 billion by 2019
Release shareholders’ national currency paid-in capital ($0.5-2 bn)
Tight budget discipline
Possible increase to expand developing country “voice”
Recapitalization of the World Bank Group:


General Capital Increase
Selective Capital Increase to expand developing country “voice”
Source: Zedillo Commission Report (2009), Repowering the World Bank for the 21st Century, Washington DC: World Bank Group.
A selective capital increase linked to “voice” would
expand developing countries’ voting shares

First phase of “voice” reforms (approved in January 2009):





New chair for Sub-Saharan Africa, with 3 seats on the Bank’s 25 member
Board
Increase in developing countries’ shares in IBRD to 44.1 % and beyond that in
IDA
Amending the World Bank’s Articles of Agreement by early 2010
Selection of WBG President through merit-based, transparent and open
process
Second phase of “voice” reforms (underway):



Review of basic principles, criteria and mechanism for realigning IBRD
shareholding
Additional increase in developing countries’ voting power by at least 3%, on
top of the 1.46% from the first phase, bringing their total share above 47%
A Voice Review by the IFC Board to be discussed
Conclusion: Reforming the multilateral system requires
financial responses… and institutional changes

Reviving growth requires access to non-inflationary sources of finance
 Financing growth in middle-income countries requires capital
increases for the multilateral development banks
 Financing growth in low-income countries requires increases in
concessional development assistance, particularly replenishment of
International Development Association (IDA-16)

Incorporating new powers into the multilateral system… Designing fora
like the G-20, the World Bank board, or the WTO to bring countries
together around cooperative collective actions to solve real problems

Using the World Bank, among other multilateral institutions, in global
cooperation to fight poverty, improve the environment, and raise living
standards
References and Further Reading
Cecchetti, Stephen, Marion Kohler, and Christian Upper “Financial crises are different!
Refining the Reinhart-Rogoff estimates” EUVox 28 October 2009
Consensus Forecasts, October, 2009.
Reinhart, Carmen and Kenneth Rogoff (2009) This Time is Different Princeton:
University Press
Roubini, Nouriel, Roubini Global Economics www.rgemonitor.com
Sachs, Jeffrey The Common Wealth: Economics for a Crowded Planet, 2008
JP Morgan, Global Data Watch, October and November 2009.
World Bank, Global Economic Prospects, 2007 Managing the Next Wave of
Globalization, Washington: World Bank
World Bank, www.worldbank.org/prospects
Zoelick, Robert “The New Multilateralism” Speech to Brookings Institute, October 2008
The Changing Nature of Multilateralism:
the Role of the World Bank
Richard Newfarmer
Special Representative to the WTO and UN
World Bank
Geneva, Switzerland
November 24, 2009