Wall Street? No, not exactly…
This Thursday’s New York Times business section carried a very interesting piece on Jim Kim, President of the World Bank, entitled “The World Bank is Remaking Itself as a Creature of Wall Street.” The subtitle is “Jim Yong Kim, the World Bank’s President, is trying to revitalize the hidebound institution. But his embrace of Wall Street is controversial.” The article goes on to link a World Bank “search for relevance” with the “embrace of Wall Street.” It picks up the long familiar theme of how small World Bank lending is compared to capital flows, and without using the term points to “crowding in” private capital as the solution – again a familiar theme from the last few years. President Kim is described as a newfound fan of finance language, notably “deals on the table,” putting forward a handful of Wall Street related big initiatives related to the IFC (including the infrastructure MCPP), while in the World Bank itself “traditionalists are squirming.” The article winds up with a discussion of World Bank incentives ( Read More… ).
It’s a good article, and I encourage everyone to read it. There are many accurate points – notably the big picture dynamic, and though the discussions for a WBG capital increase sit unvoiced in the background, the appeal of the headline to the current US Administration is implicitly well laid out. The internal tension within the Bank on the new strategic direction exists.
But what is also interesting, and a bit more distant from reality, is the central “Wall Street” image.
Sure, the gist of the World Bank’s strategy, notably for the most capital-intensive area of infrastructure, has turned to focus on attracting private capital. Yet it misleads to put that at the doorstep of President Kim or the World Bank, as an esoteric idea unshared by anyone else in the development community. Since the Addis Adaba 2015 Summit on the future of Development Finance, the consensus among a large part of the development community has been that the aspirations of the developing world – embodied, among other ways, in the widely shared Sustainable Development Goals – are growing while aid flows are shrinking, and that “crowding in” private capital is the only way to get there from here. So nothing new there. There is a mantra that the high capital needs of developing countries can be connected to the trillions of savings being managed by institutions such as pension funds and insurance companies, usually headlined as “Billions to Trillions.” Nothing new there either. International institutions, such as the WBG, have also long been seen as potential intermediaries for private capital. And yes, the WBG has been trying – correctly in my view – to realign internal objectives in order for the policy side of the Group to devote more attention to helping countries create the enabling environment for such capital to come in, and for the capital coming in to be increasingly aligned with high development payoff investments. But Wall Street?
Eventually, “Wall Street” will play a bigger role in development finance. Eventually, there will exist the type of conditions which will attract big institutional capital. Those conditions would clearly include scale – making small investments in the millions or tens of millions of dollars is completely inefficient for institutions trying to invest trillions, reasonable risk – generally at or close to “investment grade”, and enough similarity in the assets that some kind of secondary market can evolve – as it has in much of the OCED for infrastructure assets. None of these conditions exist today. At most what we are seeing – as in the IFC’s ground-breaking initiative to package greenfield infrastructure assets into a structure that meets the criteria of institutional investors, its MCPP program – are the first concrete steps in this direction. The first miles on a 100+ mile road. Good, but not yet at the forefront of Wall Street’s origination needs. Instead, what success will look like, along the next many miles of this road, is more governments devising approaches to bring private capital in to meet their needs, and an increase in private financing by international institutions like the WBG, and the growth of domestic capital markets in many countries to finance the growing asset pool. Eventually reaching a scale that attracts Wall Street more systematically.
So is this “Wall Street” headline just some kind of inaccuracy? Maybe. It is a simplification which gets attention. Catchy. But also exactly the kind of simplification which is likely to increase internal resistance within the World Bank. A red flag to a bull…
Why should this be? Not for the stereotyped reason touched on in the article, that World Bank staffers are intrinsically opposed to private investment. Sure, ideology exists, in the World Bank as in the US and everywhere in the world, but in my three decades interacting with ex-World Bank colleagues, ideological opposition to the private sector was always a minority. But, there is private sector, and there is private sector. In the US, and everywhere in the world, some private sector actors consciously seek to contribute positively to countries and communities where they operate, alongside the large-scale benefits in job creation and such they bring forth. And some actively seek to defeat the reasonable objectives of governments and communities, as getting “in the way.” Or worse operates through state capture, and corruption. This is a divide within the private sector, one that has been growing over the past 20 years – with the advent of sustainability-type programs in many corporations. And one side of that divide, the one that lends itself to the stereotypes of “the rapacious private sector,” clearly can bring out widespread antibodies throughout the staff of the World Bank. And of people in general, outside of the World Bank. “Wall Street,” for better or for worse, is a shorthand that tends to carry that negative imagery.
Let’s hope that World Bank staff, and other readers of the NYT article, get the substance, and don’t get stuck on the headline. President Kim, and all the WBG’s member countries, need all the help they can get – and not a bump-up in ideological resistance.