Transcript Newfarmer Changing Multilateralism and the World Bank

The Changing Nature of Multilateralism:
the Role of the World Bank
Richard Newfarmer
Special Representative to the WTO and UN
World Bank
Geneva, Switzerland
December 10, 2008
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 near term 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…requiring multilateral
solutions

Distribution of benefits will be uneven…hence need for development
assistance

Increased trade and financial flows increases policy spillovers with potential
beggarBecause
thy neighbor
– hence
the need forand
new because
disciplines and
ofeffects
global
integration
of
learning about policies that work (policy convergence)

their increasing importance in the world
economy,
countries
have
tocommon
be -Disruptions
in somedeveloping
globalized markets
could become
more
labor markets,
and energy, and
– hencepolicy
needs foractions
collective
centralfood
participants
in financial
multilateral
responses
for these policies to be successful

Environmental pressures will become severe – hence needs for concerted
multilateral action to protect the global commons

Migration and cross-border movement of people spread infectious diseases
– hence need for coordinated health response
Financial crisis: Macroeconomic policy and changes in the
US financial system create conditions for the perfect
financial storm…with profound multilateral consequences



Excessively easy money after 2001
Fiscal stimulus as US budget swung from surplus to large deficit
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
…financed by China and other countries accumulating large reserves

The bubble bursts..and financial panic sweeps
through global markets
MSCI equity price indexes, January 2005=100
250
Emerging markets
200
Euro Area
150
USA
100
Oct-2007
Source: World Bank, Global Economic Prospects, 2009
M
9
20
08
M
5
20
08
M
1
20
08
M
9
20
07
M
5
20
07
M
1
20
07
M
9
20
06
M
5
20
06
M
1
20
06
M
9
20
05
M
5
05
20
20
05
M
1
50
Equity markets plummet... weakening exchange rates as
funds seek safety in foreign assets
MSCI Equity market index ($), Jan-1 2007=100
150
Exchange rates, LCU/USD index Jan-01-2008 =100*
140
* increase implies weaker local currency
Brazilian real
135
130
120
120
105
110
90
100
75
90
60
80
45
01/01/200706/01/200711/01/200704/01/200809/01/2008
01/01/08
04/01/08
07/01/08
Source: Morgan-Stanley, Thomson/Datastream.
10/01/08
For emerging markets, bond spreads increased
dramatically.. notably for firms
Emerging-market bond spreads
Jan 2007 – Dec 1, 2008
Basis points
1,100
1,000
Corporate bonds (CEMBI)
900
800
700
600
500
400
300
200
Sovereign bonds (EMBI Global)
100
Jan-07
May-07
Source: JPMorgan Chase.
Sep-07
Jan-08
May-08
Sep-08
…and lending freezes as banks and financial
companies retrench
billions U.S. dollars
400
Bank loan commitments
300
Equity issuance
200
100
Bond issuance
20
08
M
5
20
08
M
1
20
08
M
9
20
07
M
5
20
07
M
1
20
07
M
9
20
06
M
5
20
06
M
1
20
06
M
9
20
05
M
5
20
05
M
1
20
05
M
9
20
04
M
5
04
20
20
04
M
1
Source: World Bank, Global Economic Prospects, 2009
M
9
0
High-income countries in recession
Growth of real GDP, percent change annualized
4
2
0
Q1
Q2
Q3
-2
-4
United States
Euro Area
Source: World Bank and National Agencies.
Japan
Demand is dropping out of the world market…and trade will
likely contract, for the first time since 1982
Annual growth of global trade volumes
Percentage change
15
12
9
6
3
0
-3 1981
1984
1987
1990
1993
1996
Source: World Bank, Global Economic Prospects, 2009
1999
2002
2005
2008
Decline in import growth affecting exports from
developing countries...
Percentage change
(12m/12m)
15
Annual growth of import volumes
U.S. imports
10
5
0
Latin American exports
-5
1999.1m
2000.07m
2002.1m
2003.07m
2005.01m
Source: World Bank
2006.07m
2008.1m
Private capital flows set to decline sharply in 2009
$ billions
Percent
Net private debt and equity flows
8
1000
Percent of GDP
(right axis)
800
6
600
4
400
2
200
0
0
1990
1993
Source: World Bank.
1996
1999
2002
2005
2008P
Financial crisis rapidly spreading
to real economy
30
annualized growth of industrial production in China
20
10
0
-10
2006M1 2006M5 2006M9 2007M1 2007M5 2007M9 2008M1 2008M5 2008M9
Source: World Bank.
Developing country investment growth is slowing
Growth of real fixed investment, percent yr on yr
40
Venezuela
30
Russia
20
Thailand
10
Indonesia
0
-10
Q1-06
Q3-06
Source: Haver Analytics.
Q1-07
Q3-07
Q1-08
Q3-08
…and is dragging industrial production sharply down
industrial production, ch% saar
20
15
Developing Countries
10
5
0
High Income OECD
-5
2006M1
2006M5
2006M9
2007M1
2007M5
2007M9
2008M1
2008M5
Multilateral response: Effort at macroeconomic
coordination….

October communication among G-7


Central bank swap arrangements
IMF moves into action – Iceland, Hungary, Pakistan

November G-20 meeting

Agreement to coordinate fiscal stiumulus
 Pledge to avoid increases in protection
 Agreement on long term work program and subsequent
meetings
December


Efforts to conclude Doha round…
(The G-20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, India,
Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Turkey, South Korea, United
Kingdom, and the United States, with the participation of the IMF, World Bank, the EU Presidency
(France), and the Chairs of the International Monetary and Financial Committee (IMFC) and the
Development Committee (DC) )
Policy Directions as illustrated by G-20
Fighting this Crisis
1. Global Fiscal Stimulus
2. Restraining Protectionism
3. Enhanced IMF Resources
Preventing the Next One
1. College of supervisors
2. Managing systemic risk
3. Oversight of Credit Rating Agencies
4. Enhanced disclosure/common accounting
Reflecting New Realities/Enhancing Legitimacy
1. G-20 or G-8?
2. Developing countries in Global Stability Forum, IMF , WB
World Bank’s role…

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
learning about policies that work (policy convergence)

Disruptions in some globalized markets could become more common -labor markets, food and energy, and financial – hence needs for collective
responses

Environmental pressures will become severe – hence needs for concerted
multilateral action to protect the global commons

Migration and cross-border movement of people spread infectious diseases
– hence need for coordinated health response
The World Bank’s role…

Provide financial resources for investment
 directly through loans -- $25 b. in 300 loans
in 100 countries
 Indirectly – guarantees and insurance
 Co-financing – 130 projects for $6.3 b.
 Manage trust funds – 900+ for $5.0 b.

Provide knowledge about what works in poverty
reduction and what doesn’t
 through policy advice – 500 studies
 technical assistance – 450 TA activities
 bringing people together - learning

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’s strategy at the country level…

Invest in people to empower the poor
 Basic social services and program that target the rural poor and women
 Bank lent $40 billion for more than 500 projects for human development
in 100 countries.

Promote pro-poor growth to raise living standards and reduce poverty
 Create an investment climate conducive to private sector expansion
• Macro stability
• Property rights
• Efficient business regulation
 Improve governance
 Invest in infrastructure

Protect the environment so that growth is sustainable
 Invest $1.5 b. annually in environmental projects
 Invest $6 b. in energy and clean infrastructure
 Manage Global Environmental Facility and Montreal Protocol
 …Larger financier of environmental projects in world
What are the Origins of the World Bank?
As an International Organization
• 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
• 24
now second largest (15%)
Executive Directors
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.
Conclusions: Strengthening the multilateral system
requires….



Incorporating new powers into the multilateral system
Designing fora like the G-20 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
Roubini, Nouriel, Roubini Global Economics www.rgemonitor.com
Global Sach, Jeffrey The Common Wealth: Economics for a
Crowded Planet, 2008
World Bank, Global Economic Prospects, 2007 Managing the Next
Wave of Globalization, Washington: World Bank
World Bank, Global Economic Prospects, 2009 Commodities at
the Crossroads, Washington: World Bank
World Bank, www.worldbank.org/prospects
Zoellick, Robert “Modernizing Multilateralism and Markets”
Speech to the Peterson Institute, October 2008
http://intranet.worldbank.org/WBSITE/INTRANET/UNITS/INTPRESIDENT2007/0,,contentMDK:21927552~menu
PK:64821535~pagePK:64821348~piPK:64821341~theSitePK:3915045,00.html
The Changing Nature of Multilateralism:
the Role of the World Bank
Richard Newfarmer
Special Representative to the WTO and UN
World Bank
Geneva, Switzerland
December 10, 2008