Is Development for the World Bank mainly Doing Business?

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: The World Bank has finally given up defending its controversial, but influential Doing Business Report (DBR). In August, the Bank “paused” publication of the DBR due to a “number of irregularities” after its much criticized ranking system was exposed as fraudulent.

Apparently, data from four countries – China, Azerbaijan, the UAE and Saudi Arabia – was “inappropriately altered”, according to the Wall Street Journal. Exposure of these irregularities was the final straw: now, it is uncertain whether the DBR will return after its suspension.

Exposing the lie

After Chief Economist Paul Romer told the Wall Street Journal two years ago that he had lost faith in the “integrity” of the DBR, and apologized to Chile for possibly politically motivated data manipulation, he was forced to resign. The Economist commented then, “His resignation may not end the controversy”.

Romer later received the so-called Economics Nobel Prize subsequent to his resignation. Almost two decades ago, Joseph Stiglitz also received the Prize after being forced to resign following differences with US Treasury Secretary Larry Summers in the wake of the 1997-1998 Asian financial crisis. later received the so-called Economics Nobel Prize following his resignation.

When Justin Sandefur and Divyanshi Wadhwa of the Center for Global Development (CGD) exposed how ostensibly methodological tweaking changed Chile’s and India’s DBR rankings to bolster “market-friendly” Piñera and Modi vis-à-vis their more centrist opponents. Simeon Djankov, founder of the Bank’s Doing Business index, dismissed the CGD and the two authors as “reformed Marxist”.

Doing Business vs SDGs

Djankov insisted that the DBR is about the costs of doing business, not “the benefits of running a society”. He contemptuously told those who criticised the DBR for failing to consider social or environmental impacts, to create their own “index that says the benefits of …regulation”.

For the DBR, it did not matter if reducing regulations harmed the environment or employment conditions, or if lowering taxes constrained governmental capacity to fund public investment and provide decent public health or social protection as long as such “reforms” lowered the costs of doing business.

Singlehandedly, Djankov exposed the shallowness of the Bank’s commitment to the Sustainable Development Goals (SDGs). By undermining social and environmental dimensions, Djankov exposed the Bank’s actual attitude to sustainable development.

Hence, the Bank had little choice but to ditch the DBR, which has already done enormous damage to development by encouraging harmful tax competition and ‘races to the bottom’ with regard to the protection of the environment and labour rights.

Racing to the bottom for nothing

Governments seek improvements in their country’s DBR ranking believing that it will increase growth via increased investment, especially foreign direct investment (FDI). However, the evidence has been disappointing.

For example, a World Bank Policy Research Working Paper found that, “on average, countries that undertake large-scale reforms relative to other countries do not necessarily attract greater [foreign direct investment] inflows”. For developing countries, it found an insignificant statistical relationship. Another study concluded, “the various studies do not provide guidance on which of the wide range of possible [investment climate (IC)] reforms are most strongly correlated with increased growth”.

Such ranking competition has encouraged debilitating investor-friendly government behaviour. The index has become a tool for governments to formulate, evaluate and legitimize their economic policies. Some now game the system to notch up their countries’ ranking with essentially cosmetic reforms.

Indonesia’s recent “Omnibus Bill” ostensibly for job creation includes many market-friendly reforms that would most certainly boost Indonesia’s DBR ranking. The bill, from a government increasingly influenced by the Bank, is now widely criticised for heavily favouring powerful business interests at the expense of workers, human rights and the environment.

Agrarian counter-revolution

Ditching the DBR may be a good start, but is far from enough. The Bank must also end other similar ‘ideologically driven’ exercises, such as its Enabling the Business of Agriculture (EBA) and Investing Across Borders (IAB) indicators, which prioritise FDI, typically at the expense of some SDGs.

The Bank’s EBA indicators project is an extension of its Benchmarking the Business of Agriculture (BBA) programme, first launched in 2013. BBA, partly based on the DBI methodology, was created after the G8 asked the Bank in 2012 to develop such an index for the G8’s controversial New Alliance for Food Security and Nutrition programme.

The Bank claimed, “The indicators provide a tangible measure of progress and identify regulatory obstacles to market integration and entrepreneurship in agriculture”, leading to a more modern commercial agriculture sector. Private agribusiness investors will be the main beneficiaries of its proposed land policies and environmental protection deregulation.

But the Bank does not bother to explain how farmers, especially smallholder or peasant farmers, will benefit from the proposed reforms or from large-scale commercial agriculture. Our Land; Our Business highlighted that the EBA will encourage corporate land grabs and undermine smallholder farmers who produce 80% of food consumed in the developing world.

In January 2017, over 158 organizations and academics from around the world denounced the EBA to the WB President and its five Western donors (USAID, DFID, DANIDA, the Netherlands, and the Gates Foundation), demanding its immediate end.

In response, the Bank made some cosmetic changes and dropped its controversial land indicator. However, its latest (2019) EBA still reflects its strong bias for commercial agricultural inputs and mono-cropping, undermining food security, sustainability as well as customary land holdings.

Favouring Foreign Direct Investment

The Bank’s International Finance Corporation (IFC) introduced its Investing Across Borders (IAB)indicators in 2010. Heavily influenced by Hernando de Soto, the IAB indicators were designed to complement the Bank’s DB indicators.

The IAB indicators claim to help accelerate economic growth by giving primacy to FDI as a driver for job creation, technology transfer, upgrading skills, fostering competition and fiscal consolidation. In fact, IAB indicators encourage frameworks that limit benefits for host countries besides enhancing the harmful effects of cross-border investment deals.

The indicators also violate the letter and spirit of the IFC’s Performance Standards for Environmental and Social Sustainability; Principles for Responsible Agricultural Investment respecting rights, livelihoods and resources; Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests; and various other international instruments.

One size never fits all

The rise and fall of the DBR expose the dangers of using and exaggerating the significance of standardised rankings for very different countries and business environments. An IC is typically complex and difficult to reduce to a few key indicators, let alone a meaningful composite index.

Reforming only certain aspects of business regulation because of the influence of Doing Business cannot possibly be optimal, especially when government capacity is constrained. Academic literature reviews conclude, “while there is empirical evidence that institutional reform can promote growth, it is less clear which reforms matter most, how to prioritise possible IC reforms, and what kinds of institutional frameworks and functions are needed”.

Growth drivers and constraints are very context specific, so reform priorities should also be context specific. Therefore, a one-size-fits-all approach to measuring and understanding complex investment environment issues is very problematic, especially one based on the interests and priorities of particular institutions and powers.

The Bank should stop doing harm by concentrating on its original mandate of intermediating finance at the lowest possible cost for sustainable development, relief and recovery in our extraordinary times. It should stop misleading the world, especially developing countries, with its highly biased supposed knowledge products.

Related IPS publications

“World Bank Must Stop Encouraging Harmful Tax Competition”, 10 October 2017. http://www.ipsnews.net/2017/10/world-bank-must-stop-encouraging-harmful-tax-competition-2/

“Stop worrying about ‘Doing Business’ ranking”, 23 December 2016. http://www.ipsnews.net/2016/12/stop-worrying-about-doing-business-ranking/

“More of the Same: World Bank Doing Business Report Continues to Mislead”, 15 December 2016. http://www.ipsnews.net/2016/12/more-of-the-same-world-bank-doing-business-report-continues-to-mislead/

“World Bank Dispossessing Rural Poor”, 18 April 2019. http://www.ipsnews.net/2019/04/world-bank-dispossessing-rural-poor/

World Bank’s ‘Mobilizing Finance for Development’ not financing development

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY, KUALA LUMPUR: The World Bank leadership must urgently abandon its ‘Maximizing Finance for Development’ (MFD) hoax. Instead, it should resume its traditional multilateral development bank role of mobilizing funds at minimal cost to finance developing countries.

Funding is urgently needed for Covid-19 containment, relief and recovery efforts, to prevent recessions becoming protracted depressions and to achieve the Sustainable Development Goals (SDGs).

Mobilizing funds, maximizing finance

The World Bank’s MFD – a reheated version of its 2015 Billions to Trillions: Transforming Development Finance (B2T) campaign – promised to leverage billions of ODA into trillions of development finance. However, MFD has failed to achieve its purported objective to fill the estimated US$4~5 trillion annual SDGs funding gap.

Blended finance and public private partnerships (PPPs) are its two main instruments for such leveraging without offering evidence that either can and will deliver development projects much better than traditional public procurement.

Both benefit private finance at the expense of the public interest, particularly by increasing the risks of government contingent liabilities. Increasing such exposure is presented as an unavoidable cost of raising additional finance.

The Bank has long claimed that private finance offers the best solution to pressing development and welfare concerns. Its MFD strategy urges using public money to leverage private finance, and capital markets to transform bankable projects into liquid securities.

It presumes that most developing countries cannot achieve the SDGs’ Agenda 2030 with their own limited fiscal resources, especially as overseas development assistance (ODA) becomes increasingly scarce.

The strategy envisages multilateral development banks (MDBs) and development finance institutions increasing financial leverage through securitization to attract private investment, particularly by institutions.

It would deploy scarce public resources to ‘de-risk’ such financing arrangements by transforming ‘bankable’ development projects into tradable assets. Thus, governments bear more of the risks and costs of greater financial fragility.

The MFD approach had mobilized only US$0.37 of additional private capital for every US$1 of public money invested in low-income countries (LICs), according to an April 2019 study. Leverage ratios were generally low across sectors, and lowest for LIC and middle-income country (MIC) infrastructure.

Blended finance no magic bullet

The study also revealed that blended finance has effectively transferred risk from the private to the public sector. The public sector had borne 57% of the cost of blended finance investments on average, but 73% in LICs. Despite ever more public subsidies to incentivize private investment in LICs, leverage ratios may have declined.

Thus, “the big push for blended finance risks skewing ODA away from its core agenda of helping eradicate poverty in the poorest countries”. Others fear that blended finance “will crowd out ODA rather than crowd in private finance”.

Blended finance – “a heady cocktail of public, private and charitable money”, according to The Economist – came into vogue following the 2015 UN Conference on Financing for Development in Addis Ababa.

The Economist called it a “honey trap”, noting that blended finance was “floated at all manner of gatherings, from the recent meetings of the IMF and the World Bank to the World Economic Forum (WEF) in Davos”. The WEF claimed that every dollar of public money invested typically attracted US$1~20 in private investment.

However, as The Economist recently found, “blended finance has struggled to grow. Since 2014 the flow of public and private capital into blended projects and funds has stayed flat at about US$20bn a year…far off the goal of US$100bn set by the UN in 2015” for climate investments by 2020. On average, MDBs mobilize less than US$1 of private capital for every public dollar.

The Economist concluded, “merging public and private money will always be hard, and early hopes may simply have been too starry-eyed. A trillion-dollar market seems well out of reach. Even making it to the hundreds of billions a year

may be a stretch”.

Public finance, private profits

An early 2018 World Bank review of regulatory frameworks for procuring PPP infrastructure projectscame up with a long list of shortcomings in both developed and developing countries.

It found poor “government capabilities to prepare, procure, and manage such projects constitutes an important barrier to attracting private sector investments”. Thus, authorities often failed to consider PPPs’ fiscal implications, risks of opportunistic renegotiations and lack of transparency.

A 2018 European Court of Auditors report recommended that the EU and member states “should not promote a more intensive and widespread use of PPPs until the issues identified in this report are addressed”.

It had found “widespread shortcomings and limited benefits, resulting in €1.5 billion of inefficient and ineffective spending. In addition, value for money and transparency were widely undermined, particularly by unclear policy and strategy, inadequate analysis, off-balance-sheet recording of PPPs and unbalanced risk-sharing arrangements.”

Likewise, a 2018 UK National Audit Office report noted that it has “been unable to identify a robust evaluation of the actual performance of private finance at a project or programme level.” It also found the costs of one group of PPP projects in education around 40% higher than for a project financed by government borrowing.

Similarly, the Australian Auditor-General’s report on private health sector involvements concluded, “It appears governments have embarked on the path of increased privatisation without the benefit of rigorous analysis of the benefits and costs. Individual examples of privatisation have highlighted many problems which have resulted in costs rather than savings to the public purse”.

A more recent study concluded, “The mixed public-private funding and provision has had a deleterious effect on the Australian hospital system”. Clearly, PPPs have been much abused, even in developed countries with presumably better regulatory, governance and oversight capacities and capabilities than in most developing countries.

Mobilizing finance for private partners

In October 2017, ahead of the World Bank Group annual meeting, 152 organizations from 45 countries issued a manifesto opposing “the dangerous rush to promote expensive and high-risk public-private partnerships (PPPs)”. It pointed out that the “experience of PPPs has been overwhelmingly negative and very few PPPs have delivered results in the public interest”.

The World Bank’s Public Private Partnership in Infrastructure Resource Center (PPPIRC) has identified ten important risks of PPPs, such as “development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes”.

The PPPIRC warned that “the cost has to be borne either by the customers or the government through subsidies”, and that the “private sector will do what it is paid to do and no more than that”.

Thus, there are serious doubts about the extent to which governments can count on the private sector to support sustainable development. Yet, the Bank claims unambiguously, “PPPs are increasingly recognized as a valuable development tool by governments, firms, donors, civil society, and the public”.

With the current World Bank leadership trying to reduce developing countries’ debt, it may well abandon the former Obama-appointed World Bank President’s MFD. But it also seems to be eschewing banks’ financial intermediation role of raising and lending funds at low cost to developing countries.

Related IPS readings:

1. “World Bank Financializing Development”

2. “Blending Finance Not SDG Financing Silver Bullet”

3. “World Bank Financialization Strategy Serves Big Finance”

4. “Hospital PPPs Undermine Healthcare”

5. “PPPs Likely to Undermine Public Health Commitments”

Multilateral Bank Intermediation Must Help Developing Countries' Recovery

Jomo Kwame Sundaram, Anis Chowdhury

SYDNEY and KUALA LUMPUR, Aug 07 (IPS)  - International Monetary Fund (IMF) Managing Director Kristalina Georgieva has warned that developing countries would need more than the earlier estimated US$2.5 trillion to provide relief to affected families and businesses and expedite economic recovery.

With their limited fiscal capacities, developing countries will need to borrow more, increasing their often already high public debt burdens. Developing country debt has grown rapidly since the 2008-2009 global financial crisis (GFC), reaching historical highs even before the pandemic.

A deep pandemic induced depression may also require governments to take over huge private debt liabilities. All this has increased calls for urgent debt relief, cancellation and restructuring, and for new IMF and World Bank lending lines, including new IMF special drawing rights (SDRs).

Not enough debt relief

On 13 April, the IMF approved debt service relief for 25 eligible low-income countries (LICs), estimated at US$213.5 million, for six months, i.e., from 14 April until mid-October 2020.

On 15 April, G20 leaders announced their ‘Debt Service Suspension Initiative for Poorest Countries’ from May to the end of 2020 for 73 primarily LICs. The G20 initiative would cover around US$20 billion of bilateral public debt owed to official creditors by International Development Association (IDA) and least developed countries (LDCs).

Such steps are welcome, providing some temporary relief, but far short of the eligible countries’ long-term public and publicly guaranteed external debt of US$457 billion in 2018.

UNCTAD estimates that in 2020 and 2021, middle- and low-income countries face debt service repayments between US$700 billion and US$1.1 trillion, while upper middle-income developing countries expect to pay US$2.0~2.3 trillion.

The G20 initiative is already seen as merely kicking the can down the road. It does not cancel any debt, which is to be repaid in full over 2022–2024, as interest continues to grow. Hence, it is quite unlike the Heavily Indebted Poor Country (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI).

Furthermore, money saved from debt relief “can be used to pay the private creditors on time and in full”, i.e., prioritizing private over public creditors. The G20 initiative only applies to a limited number of countries, and does not impact the US$8 billion owed to private lenders and the US$12 billion debt to multilateral creditors.

An Oxfam report estimated that eligible countries are still required to pay at least US$33.7 billion for debt servicing this year, or US$2.8 billion monthly, “double the amount Uganda, Malawi, and Zambia combined spent on their annual health budget”.

Furthermore, the initiatives presume that Covid-19 shocks to developing economies will be short and swift, and that developing countries can make debt repayments over the next 3-4 years.

IMF and World Bank falling short

The World Bank has put in place a US$14 billion fast-track package to meet immediate health and economic needs, envisaging financial support of around US$160 billion during 2020-2021.

The IMF has doubled access to its Rapid Credit Facility and Rapid Financing Instrument to meet greater expected demand for emergency financing of about US$100 billion, without requiring “a full-fledged program in place”. By mid-June, various IMF facilities had committed around US$300 billion.

Although these financing instruments involve fewer conditionalities and faster approval, eligibility still depends on familiar — and, in current conditions, very restrictive — criteria. These include, inter alia, having to satisfy the ‘revamped’ joint Bank-Fund debt sustainability framework, which critics deem “obsolete”.

Therefore, actual urgent liquidity support falls far short of the IMF’s US$1 trillion lending capacity while the attempt to issue new SDRs for Covid-19 has been blocked by the Trump administration.

Debt reduction wrong priority now

The UN warned of the dire consequences of the Covid-19 pandemic in April, and in May, argued that without bold policy action, the pandemic would set back the SDGs.

Facing the greatest economic crisis since the 1930s, many developing countries have little choice but to borrow to create fiscal space, rather than focus on complicated, time-consuming long-term debt restructuring, workouts or buybacks.

Instead of obsessing over debt, some developing countries are tapping global debt markets to meet Covid-19 financing needs. When governments can borrow on reasonable terms to invest in projects needed for sustainable development, debt may even be desirable, if not necessary, especially in resource-poor countries.

For some, in a low interest rate environment, it is reasonable for developing countries to borrow more, even raising their debt/GDP ratios to levels previously regarded as dangerous, to fund recovery. This time, it is really different as debt costs are lower and are expected to stay low for some time to come.

Furthermore, the consequences of fiscal inaction, so as to not take on debt, can be disastrous for the developing world, paradoxically making current stock of debt unsustainable. On the other hand, new borrowing to mitigate the negative impact of the pandemic on growth can make debt sustainable.

However, most non-investment grade developing countries have to pay substantially higher risk premiums, due to the prejudices and biases of market finance, even when their macroeconomic ‘fundamentals’ are sound.

Pandemic emergency financing fiasco

After the 2014 Ebola epidemic in West Africa, the Bank launched the Pandemic Emergency Financing Facility (PEF) in July 2017, using insurance-like ‘catastrophe bonds’ and derivatives to raise private sector money for LICs’ pandemic responses.

The PEF promised to “blend the best of the public and private sectors, helping to keep 1.6 billion people safe” while “transferring [financial] risk [from governments] to international markets”.

To draw investors, the PEF has stringent and controversial rules on when and how much to pay-out. To make them attractive to investors, PEF bonds were designed to reduce the probability of paying out.

Due to its complicated approval process the PEF had not paid out a single dollar until the end of March, although the World Health Organization designated the Covid-19 outbreak a “public health emergency of international concern” on January 30, and a “pandemic” on 11 March. The pay-out decision was only made on 27 April; as of 27 July, only a paltry US$146.5 million had been “transferred to support” 48 countries — “too little, too late”, even for The Wall Street Journal.

Meanwhile, its “cash window” – funded by donors – has not been replenished after being used up for the Ebola outbreak in the Democratic Republic of Congo in 2018-2019.

In April 2019, Larry Summers, former World Bank chief economist and US Treasury Secretary, described the PEF as “an embarrassing mistake” and “financial goofiness”, noting that the programme was “loved” for promoting private sector involvement.

Intermediation role required

With preferred creditor status, the Fund and the Bank can borrow ‘cheaply’, i.e., at the much lower interest rates available to them. By intermediating, they can enable developing countries, especially LICs and LDCs, to borrow cheaply for their relief and recovery.

A first step would be to ditch the last Bank president’s now discredited ‘mobilizing finance for development’ (MFD) framework to use public funds, including official development assistance (ODA), to leverage private finance for public-private partnerships (PPPs).

As with the PEF, the MFD approach has failed to leverage billions in ODA into trillions of development finance, as promised, mobilizing only US$0.37 of additional private capital for LICs for every US$1 of public money invested.

Visit this story at http://ipsnews.net/2020/08/multilateral-bank-intermediation-must-help-developing-countries-recovery