“Sensible division of labour”

For poverty to be reduced, private businesses must generate jobs. In other words, they must be successful enough to hire new staff. Can international development finance institutions contribute to making that happen?
Yes, they can.

• First of all, they can contribute to making sure that the kind of infrastructure that businesses need is built in developing countries and emerging markets. Relevant issues include water supply, electric power, transport, telecommunication et cetera. For good reason, financing such things has always been an important part of development banks’ mandate.
• Moreover, they can help governments to foster a healthy business environment in regard to regulations and institutions. For example, every country needs a well-functioning government-revenue system that taxes everyone reasonably, so state agencies are able to act, for instance, in regard to the infrastructure I just mentioned. Every country similarly needs a judicial system that can handle disputes in a fast and trustworthy manner. International institutions can – and must – provide competent advice in these matters.

And that is why the World Bank has been claiming to be a “knowledge bank” for quite some time. Loans are the typical tools a bank uses however. Can the World Bank really promote sensible regulation, strong institutions and good governance by handing out loans?
Well, loans from international institutions really are not that important currently. These days, it is easy to get cheap money, so no project fails because of a lack of funding. There is, however, a lack of bankable projects. A bankable project must be well designed, including in regard to human rights, environmental and social standards. Moreover, the risks need to be clearly identified. Unless all this is the case, banks will hesitate to grant loans. Accordingly, it is very important that international agencies contribute to creating business environments that are conducive to generating and implementing promising ideas. Bankable infrastructure projects are especially valuable. There currently are too few of them.

Are the IFIs, the international finance institutions, up to their tasks of knowledge brokers?
Generally speaking, they are, yes, but unfortunately there is tendency of fragmentation. The World Bank and the regional multilateral development banks should coordinate their efforts even better. Some of their work overlaps, and it can be quite surprising which agency is the decisive one. In Africa, for example, the World Bank tends to have a stronger local presence than the African Development Bank even though the latter has more regional expertise.

Giving advice to governments is the job of the GIZ, the bilateral German development agency.
Yes, and its experts contribute to improving the business climate in many places, and so do our colleagues at KfW development bank, another bilateral institution. The DEG is involved too. We advise our clients, after all. Bilateral efforts matter, and they must complement multilateral efforts. Multilateral programmes tend to be particularly influential, however, so coordination among multilateral agencies should be optimised.

There are several new development finance institutions which have been launched by emerging market governments. One example is the Asian Infrastructure Development Bank in Beijing, and its members include Germany and other European countries. Another example is the New Development Bank, which the governments of the BRICS countries – Brazil, Russia, India, China and South Africa – have set up in Shanghai. Yet another example is the Banco del Sur, which has been around for a bit longer. Must we now expect fragmentation to increase because every bank has an obvious institutional self-interest to raise its profile?
There is a certain probability of fragmentation increasing, for instance, if individual banks try to get hold of the good investment projects in the hope of disbursing their money and perhaps even competing with other banks in terms of the conditions they offer. That would be counter-productive. As I just said, money really is not the core problem today. It is more important to join forces in order to make individual countries’ business climate conducive to the kind of sustainable and eco-friendly growth that allows nations to prosper. A division of labour would make sense. The more experienced partners could provide advice geared to making projects bankable, and other institutions could then finance those projects.

But don’t the emerging-market governments have a different ideology, for instance in regard to states intervening in markets? Some observers expect the new IFIs to become a fierce competition that will make life harder for the established ones.
For two reasons, I don’t expect that to become a major problem.

• Just like the established development banks, the new ones depend on capital markets for refinancing. To raise money, they will have to adopt policies that capital-market investors find convincing. And that means they will ultimately not be that different.
• Moreover, advanced nations’ concern for the environment protection, social protection and good governance is not some kind of luxury only the rich can afford. Rather, these issues need to be dealt with for economies to be successful in the long run. It plainly does not make sense to invest in environmentally harmful production facilities, because if you do, those facilities will no longer be accepted in a few years. Trying to rely merely on the exploitation of cheap labour is not a promising business model either. Our partners in countries like China, India and Brazil understand these things quite well.

If the new development banks are not going to adopt very different policies from those of the established banks, why were they set up at all?
Well, the industrialised nations have basically been telling emerging markets to assume more responsibility, but they did not give them necessary space for doing so in multilateral institutions. The US Congress, for example, refused to accept more voting rights for emerging markets in IMF governance for years. Europe wasn’t exactly eager to renounce influence and give emerging markets more say either. One result is that there now are new institutions which are eager to do business. The aspirations are considerable. I was surprised to learn recently that the AIIB will not only be active in Asia, but has a mandate to become engaged in all its member countries. Peru has already applied for funding.

Bruno Wenn chairs the Management Board of DEG – Deutsche Investitions- und Entwicklungsgesellschaft, the  subsidiary of KfW which supports private-sector development in developing countries and emerging markets.
http://www.deginvest.de