Caixin
Jan 25, 2019 08:37 PM
WORLD

World Bank Chief’s Resignation Marks End of Era Hamstrung by Overreaching Reforms, Trump Deal

World Bank President Jim Yong Kim on Nov. 6. Photo: VCG
World Bank President Jim Yong Kim on Nov. 6. Photo: VCG

On Jan. 7, World Bank President Jim Yong Kim announced that he would be stepping down three years early from the post he has held for nearly seven years. The announcement caught the world by surprise.

The 59-year-old was appointed to the World Bank presidency in July 2012 by U.S. President Barack Obama and was re-elected in September 2016 with the unanimous consent of the bank’s board of directors.

On Jan. 8, Global Infrastructure Partners (GIP), a private capital investment company based in New York, disclosed that Kim would become a partner and vice president of the company starting Feb. 1.

On the surface, Kim’s decision to move from the public to the private sector gives the impression that the Trump administration’s attitude and policies toward multilateral institutions will make it difficult for the World Bank to continue to play its central role of providing funding to developing countries. But there is a deeper reason that reflects the plight of the bank’s first Asian-American president and the first head without an economics background.

“He’s been a lame duck in the World Bank for more than a year,” said Yukon Huang, who previously served as the World Bank’s country director for Soviet Union Republics, Russia, and China. “After so much turbulence, employees now have a fairly negative attitude.”

In office for more than six years, Kim had vigorously promoted major reforms and restructuring within the World Bank. His intention was to break down bureaucracy and improve efficiency. He managed to obtain a $13 billion capital increase, approved in April. He worked hard to increase the World Bank’s role in poverty reduction. From the 2013 to 2018 fiscal years, World Bank funding to developing countries increased from $52.6 billion to nearly $64 billion.

In a statement, Kim said: “The work of the World Bank Group is more important now than ever as the aspirations of the poor rise all over the world, and problems like climate change, pandemics, famine and refugees continue to grow in both their scale and complexity. Serving as president and helping position the institution squarely in the middle of all these challenges has been a great privilege.”

Reforms met with protest

Unlike the previous World Bank presidents since its founding after World War II, Kim has a background in medicine and anthropology, has never held any senior governmental positions, and has he never run a large enterprise or financial institution.

At the beginning of his tenure, Kim stressed the importance of reform within the bank and tried to build a simpler, more efficient and more effective institution. It was the first major reform since 1996 and included mass layoffs, cost reduction and internal restructuring.

In 2015, Kim Yong launched his two-part reform effort. The first part would focus on reforming the business organization structure and established 14 new bureaus focusing on specific areas — including health, education, water — in addition to bureaus divided by region. The second part focused on reducing staff — laying off 500 people in finance, human resources, research and other departments — and reducing spending by $400 million.

But the staff was confused and dissatisfied with the lack of information about the reform process. Employees could see there was a new structure, but had no idea what their future role would be or how their current role would be affected. On top of that was the uncertainty of the layoffs.

The employees organized a series of protests in the atrium of the bank’s headquarters, circulating a series of “yellow flyers” to encourage employees to express different opinions and gather every Thursday morning to demand answers.

Kim relied on parachuting in new executives and employing consulting firms to assist in the reform process. He believed the employee unrest would subside once it was complete.

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But even those who supported his reform initiatives were increasingly frustrated by his inability to concentrate on the process. Kim’s active response to the 2014 Ebola outbreak in Africa boosted his personal image in the media — he gained more coverage than Margaret Chan, then the director-general of the World Health Organization. But privately, it was seen as a distraction. “Last year, he was Mr. Climate Change; this year, he was Mr. Ebola,” one of his aides told The Economist.

“It's not that all his ideas were bad — of course, many of them came from consultants,” said Lant Pritchett, who worked at the World Bank from 1988 to 2000 and 2004 to 2007 and is currently a professor at the Harvard Kennedy School. The key issue was whether he had invested enough effort to follow up on the details to make these ideas flourish, Pritchett said.

Critics of Kim’s reforms say that the restructuring has been ineffective. The walls between the different parts of the World Bank are as high as they’ve ever been — if not higher. The new global business bureaus have done little to contribute to integrating the knowledge scattered across the bank. “His reforms are maybe a little out of touch with reality and go too far,” said Ian Goldin, vice president of the World Bank from 2003 to 2006.

Sandwiched between great powers

Kim’s greatest achievement during his tenure was obtaining a $13 billion capital increase with the support of the bank’s largest shareholder, the U.S. Treasury Department, in April.

But Kim had to make compromises to win the support of U.S. President Donald Trump. The bank agreed to lay off workers and limit salaries and announced that it would set up a Women Entrepreneurs Finance Initiative proposed by Trump’s eldest daughter, Ivanka Trump, which was officially established in October 2017.

“When the Trump administration came to power, people were thinking about what the ‘America First’ strategy would mean for the World Bank, and Kim was very clear-headed about this,” said Judy Shelton, a Trump economic advisor. “But he soon reached an agreement with Ivanka and established a partnership with her. I think that was very smart.”

But in the eyes of others, this political exchange damaged the integrity of an institution that supposedly aims to improve governance in borrowing countries. Though the World Bank has some independent funding, a deal with the daughter of the current president of the United States is a clear conflict of interest.

Arvind Subramanian, a senior researcher at the Peterson Center for International Economics and a former chief economist for the Indian government, said that the World Bank remained silent about trade protection in exchange for Trump’s support. Once the capital increase was agreed to and completed in June, the bank finally warned about the negative impact of protectionism on global growth.

However, the increase in capital allowed the World Bank’s annual lending capacity to increase from nearly $60 billion to $100 billion per year. The bank is therefore considered to be on more stable financial footing, which will help it to implement its development strategy going forward. With the added funding, it can partially hedge against the impact of the Asian Infrastructure Investment Bank and other Chinese-led development financial institutions that have a much greater lending capacity than the World Bank.

Subramanian believes that while funding is important, the World Bank’s development depends more on how it can affect policies, capacities and concepts in different countries.

Andrew Rogerson, a senior fellow at the London-based Overseas Development Institute (ODI), admitted that the World Bank is “big and diverse, and its shareholders are pulling it in many directions to do more and more things.”

Nevertheless, Kim also tried to set a good example visible to the world, not just to the heads of important member countries. At the end of 2017, together with French President Emmanuel Macron and United Nations Secretary-General Antonio Guterres, he launched the “One Planet Summit,” an annual meeting to fill the gap left by the U.S. withdrawal from the Paris Climate Agreement. In an effort driven by Kim, the bank has largely stopped supporting coal-fired power projects, which runs counter to the Trump government's renewed support for coal.

Regardless, the World Bank and Kim are caught between major global powers in a delicate and difficult situation. In the past, the World Bank did not have to face a White House indifferent to its existence, goals and mission. China has expressed that it still hopes to use the power of the World Bank to help promote reforms, but the bank may not be as important as is once was. Kim has voiced support for China’s Belt and Road Initiative, which has been the subject of direct criticism from American officials.

Another common criticism, as Trump has said, is the bank’s lending to China. Some U.S. Treasury officials have argued that the World Bank’s big loans to China may crowd out smaller loans to borrowers who need it more. Others argue that lending to China will bring more stable profits and give the World Bank more influence in less-developed countries.

Yukon Huang pointed out that China may not be desperate for loans from the World Bank, but can use the bank’s status as a disinterested party to help promote reform. The bank serves as an external, neutral player that can put pressure on local governments in China to improve their debt management.

Ultimately, to win the increase in capital, the World Bank agreed to charge higher interest rates on loans to upper- and middle-income countries such as China and to prioritize loans to poor countries.

Competing development banks

Such doubts now facing the bank reflect the challenges faced by the entire development bank family, which includes the World Bank, the Asia Development Bank (ADB), the European Bank for Reconstruction and Development, the European Investment Bank, the Pan-American Development Bank, the Asian Infrastructure Investment Bank, plus more than a dozen global and regional development banks.

In an April 2017 speech at the London School of Economics and Political Science, Kim made an appeal to the global development community: “Can we stop competing for projects and adopt a development financing approach based on actual results?”

He pointed out that in many cases, development financial institutions compete for projects, especially those with the lowest risk, while often avoiding projects with real demand but higher risk.

Looking at the data, the nonperforming loan ratios of the World Bank, Asian Development Bank (ADB) and the European Investment Bank — which should all have a preference for higher risk — have been close to zero. “It’s like a library that says that it’s never lost a book. (That means) it probably isn’t lending books,” Huang said.

The World Bank’s “zero tolerance” for nonperforming loans is believed to be partly due to pressure from its shareholders, the member states. The directors are highly risk-averse government officials whose short- and medium-term personal goals do not match up with the long-term needs of global development.

To this end, development financial institutions such as the World Bank need to change the incentive mechanism for employee evaluations. Huang suggested that multilateral development banks should seek to guide, rather than squeeze out, private sector investment. In speeches, Kim has mentioned that the World Bank is working on a risk mitigation mechanism that would enable institutional investors from countries in the Organization for Economic Cooperation and Development, a club of mostly rich nations, to invest in projects in developing countries and obtain investment returns.

The homogeneity of the institutionalized and somewhat rigid systems of development banks means that they cannot flexibly respond to the actual needs of the borrowing countries. “If a member country goes to the World Bank or ADB and wants to get a loan for constructing highways, development agencies will offer a full range of programs,” Huang said. “But in reality, a member country may have cheaper and more efficient engineering resources.”

What development banks lack is good project contractors and the capability to manage the bidding process, Huang said.

Who will succeed?

Since the establishment of the “Gentlemen’s Agreement” between Europe and the United States in 1944, the president of the World Bank has been nominated by the United States and the president of the International Monetary Fund has been nominated by Europe. In recent years, the international community has increasingly looked forward to a World Bank leader from developing countries. So far, however, no other country has proposed clear candidates.

On Jan. 10, the World Bank’s board of directors announced the criteria and selection process for its next presidential candidate: a proven leadership record, experience in managing large international organizations, familiarity with the public sector, a clear vision of the bank’s development mission, a firm commitment to and appreciation of multilateral cooperation, effective diplomatic communication skills, as well as impartiality and objectivity in fulfilling its responsibilities. The new president will likely be elected before the spring meeting in April, after a nomination period that runs from Feb. 7 to March 14.

A number of people have been rumored to be potential candidates for the job, such as Ray Washburne, the president and CEO of the Overseas Private Investment Corp., former CEO of Pepsi Indra Nooyi, former U.S. Ambassador to the United Nations Nikki Haley, and Goldman Sachs banker Dana Powell, who advises Trump on national security. Outside the United States, candidates considered likely to be nominated include former Nigerian Finance Minister Ngozi Okonjo-Iweala, former Chilean President Michelle Bachelet, and Nelson Barbosa, Brazil’s former finance minister.

Whoever it may be, the new president will face serious challenges maintaining the bank’s relevance in an era of increasing protectionism and declining global cooperation.

Translated by Ren Qiuyu (qiuyuren@caixin.com)

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