Commentary
A change at the World Bank signals change in both U.S. development policy to climate concerns and, possibly, creates a geostrategic risk for the United States.
David Malpass, the head of the World Bank, has announced he would leave the office in June, a year before his term was to expire. Malpass, who had been appointed by then-president Donald Trump in 2019, is a Republican who ran for the Senate from New York in 2010 and whose wife formerly chaired the New York County Republican Committee. He had held various economic and policymaking roles in Washington going back to the Reagan administration, and had been chief economist for Bear Stearns, the former investment bank.
Malpass, who had criticized the lending practices and growth of the World Bank even before his nomination to head it, came under attack from its supporters when Trump named him. He had been under pressure since September, when climate activist and former vice president Al Gore asserted, without evidence, that Malpass was a “climate denier” at a New York Times forum, despite an April 2021 New York Times story headlined, “Out of Trump’s Shadow, Malpass Embraces Climate Fight.”
When Malpass was asked about the Gore’s allegation later in the day at the same forum, he said that he had never met Al Gore and that Gore was ignorant of the World Bank’s work.
Malpass went on to list a number of climate initiatives, including his Climate Action Plan for 2021–2025. But when the program moderator asked whether Malpass accepted “the scientific consensus that the burning of fossil fuels is dangerously warming the planet,” Malpass offered a fulsome, nuanced, and detailed answer, outlining substantive programs and investments the World Bank had made on his watch. But the moderator again repeated the question in a fashion that seemed accusatory—if not argumentative—and Malpass, showing some irritation with the question, answered, “I don’t know what ... I’m not a scientist.” It was this last comment that the media chose to report, setting off a public relations feeding frenzy that ended in Malpass’s resignation from the bank early in February.
The White House has nominated Ajay Banga, the former head of MasterCard, the global credit card company, to succeed Malpass. Banga is an India-born American financial executive who is well-respected in the U.S. financial community as well as in his native India, where he was awarded that nation’s third-highest civilian honor, the Padma Shri, akin the U.S. presidential Medal of Freedom, in 2016. The son of an Indian Army officer who moved frequently for different assignments, he has said that he is adoptable and is said to be personable by colleagues. He has been an advocate for greater empowerment and women in the workplace, as well as climate activism. He pledged to have MasterCard plant 100 million trees and boasted of its “green-certified offices” and “zero-waste footprint.”
The World Bank
The World Bank was founded as part of the Bretton-Woods Agreement that reset global finance rules in 1944. It’s initial mission was to rebuild the infrastructure of European and Asian economies that had been devastated by World War II. Today, it provides “low-interest loans, zero to low-interest credits, and grants to developing countries,” as well as technical advice, to eradicate poverty and boost the income of the lowest 40 percent of the population of countries around the world.The World Bank group is comprised of five separate entities: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes. Each of them operate as cooperatives. The IBRD lends to “governments of middle-income and creditworthy low-income countries.” The IDA makes no-interest loans and grants to the poorest countries. Together, the IBRD and the IDA make up what most people consider when they refer to the “World Bank.”
The United States, Japan, China, Germany, France, and the United Kingdom are the largest shareholders, although there are 189 member counties. The United States is the largest single shareholder. Traditionally, an American has run the World Bank while a European ran the International Monetary Fund (IMF), another multilateral institution whose principal mission is to monitor national economies, to stabilize international trade, and to provide lending to recover from—and avoid—national financial crises.
A New ‘Green’ Mission?
Ajay Banga’s appointment to head the World Bank, which seems all but final, signals yet another iteration of the World Bank’s agenda and priorities. While traditionally it has been a development bank, early in this century, the World Bank shifted from development to social reform, health, and labor and pension protections. That changed again in the 2008 in the wake of the global financial crisis and changed yet again in 2019 with the appointment of Malpass, who said he hoped to “plateau” funding for the World Bank to better evaluate whether its programs were working.Now it seems the Biden administration and other climate activists are launching yet another iteration of World Bank priorities of the kind of environmental, social, and governance (ESG) investments that have become fashionable in Western capital markets over the last several years.
As several writers have noted, financial innovation that didn’t exist in 1944, like securitization, has largely made obsolete the need for the kind of long-term, big balance sheet loans the World Bank makes to developing countries. While there will always be a need for the kind of no-interest loans and grants the IDA makes to the poorest countries, the need for loans of the type IBRD, to middle-income or credit-worthy countries, has now largely passed.
Source: International Monetary Fund
But it is the nature of bureaucracies to continue on, as if by inertia, even when their missions are completed or made obsolete. That is particularly true in the international arena in organizations like the World Bank, where accountability is diffused among a board of directors of 25 members representing 189 member countries who all have different priorities.
The Biden administration, seeing an opening, and with a “green” activist agenda, will likely now use the World Bank to extend that agenda internationally. There is a geostrategic risk in moving priorities away from development to climate activism because there are a number of national development banks, and also an international development bank run by U.S. adversary China, the Asian Infrastructure Investment Bank (AIIB), launched in 2015 as a direct competitor to the U.S.-dominated World Bank.
The AIIB would be happy to step up in the absence of World Bank financing. Doing so would allow China to further expand its geopolitical influence in critical strategic areas. For example, China’s has just invested in Indonesia, a strategic island outpost between U.S. allies the Philippines and Australia, and Pakistan, a key U.S. ally in Central Asia.
