richard newfarmer special representative to the wto and un world bank geneva, switzerland the...
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Richard NewfarmerRichard Newfarmer
Special Representative to the WTO and UN Special Representative to the WTO and UN
World BankWorld Bank
Geneva, SwitzerlandGeneva, Switzerland
The Changing Nature of Multilateralism:The Changing Nature of Multilateralism:
the Role of the World Bankthe Role of the World Bank
November 24, 2009November 24, 2009
Multilateral system is changing rapidly… Multilateral system is changing rapidly…
……and the challenges of globalization require collective multilateral response… and the and the challenges of globalization require collective multilateral response… and the problems of today’s world cannot be solved without their participationproblems of today’s world cannot be solved without their participation
One example: the financial crisis can only be met with a multilateral responseOne example: the financial crisis can only be met with a multilateral response
Inexorable long term trends are increasing the economic power Inexorable long term trends are increasing the economic power of developing countries…of developing countries…
The World Bank is responding… and changing in the processThe World Bank is responding… and changing in the process
Globalization and growth are increasing the role of Globalization and growth are increasing the role of developing countries, especially the BRIICS…developing countries, especially the BRIICS…
0
5
10
15
20
25
1980 2005 2015 2030
US$ billion
Source: World Bank simulations with Linkage model.Source: World Bank simulations with Linkage model.
Exports from developing and developed countries, 1980-2030Exports from developing and developed countries, 1980-2030
Other Developing countries
High-income countries
$23 trln
61%
20%
23% BRIICs
13%
67%
21%
22%
55%
18%
76%19%5%
GDP at PPP exchange rates
0
5
10
15
20
25
30
35
40
45
2001 2005 2010 2015 2020 2025 2030
US$ trillion
USAEU
Other developing countries
China
India
China, India, and other developing countries will become China, India, and other developing countries will become centers of global demand over the next quarter centurycenters of global demand over the next quarter century
RussiaBrazil
South Africa
Indonesia
Source: World Bank simulations with Linkage model.Source: World Bank simulations with Linkage model.
Source: World Bank simulations with Linkage model.Source: World Bank simulations with Linkage model.
……and the share of developing countries in global output and the share of developing countries in global output will rise…will rise…
0
20
40
60
80
100
120
140
160
2005 2030 2005 2030
US$ trln
Other Developing Other Developing countriescountries
High-income High-income countriescountries
$66 tn.
22%
10%
48%
BRICsBRICs
13%
23%
18%
---GDP at Market Prices-------GDP at Market Prices---- -----GDP in PPP-----------GDP in PPP------
52%
20%
30%
27%
Millions of internet users
High income
Other Low & middle income0
100
200
300
400
500
600
700
1991
1993
1995
1997
1999
2001
2003
2005
A key driver is rapid diffusion of technology and A key driver is rapid diffusion of technology and knowledge…knowledge…
Source: World Bank, Global Economic Prospects (2008)Source: World Bank, Global Economic Prospects (2008)
BRIICS
Globalization will portend huge stresses as economies Globalization will portend huge stresses as economies integrate into the world economy…integrate into the world economy…
Distribution of benefits will be uneven…hence need for Distribution of benefits will be uneven…hence need for development assistancedevelopment assistance
Increased trade and financial flows increases policy spillovers with potential Increased trade and financial flows increases policy spillovers with potential beggar thy neighbor effects – hence the need for beggar thy neighbor effects – hence the need for new disciplinesnew disciplines and and learninglearning about policies that work (policy convergence)about policies that work (policy convergence)
Environmental pressures will become severe – hence needs for concerted Environmental pressures will become severe – hence needs for concerted multilateral action to multilateral action to protect the global commonsprotect the global commons
Migration and cross-border movement of people spread infectious diseases – Migration and cross-border movement of people spread infectious diseases – hence need for hence need for coordinated health responsecoordinated health response
Disruptions in some globalized markets could become more common -- labor Disruptions in some globalized markets could become more common -- labor markets, food and energy, and financial – hence needs for markets, food and energy, and financial – hence needs for collective responsescollective responses
Because of global integration makes countries Because of global integration makes countries inter-dependent, global problems require inter-dependent, global problems require multilateral solutions… with increasing multilateral solutions… with increasing participation of developing countries participation of developing countries
Successive waves of financial deregulation in the USSuccessive waves of financial deregulation in the US
One example: Responding to the financial crisis and Great One example: Responding to the financial crisis and Great RecessionRecession
Successive waves of financial deregulation in the USSuccessive waves of financial deregulation in the US
Expansion of opaque financial innovationExpansion of opaque financial innovation Subprime mortgagesSubprime mortgages Home equity lendingHome equity lending Consolidated Debt ObligationsConsolidated Debt Obligations Credit Default SwapsCredit Default Swaps
Emergence of unregulated borrowing in the Emergence of unregulated borrowing in the shadow banking systemshadow banking system Mortgage companiesMortgage companies Investment banksInvestment banks Hedge fundsHedge funds
……leading to excessive leverage of consumers, corporates, and public sectorsleading to excessive leverage of consumers, corporates, and public sectors Excessively easy money after 2001Excessively easy money after 2001 Fiscal stimulus as US budget swung from surplus to large deficitFiscal stimulus as US budget swung from surplus to large deficit ……financed by China and other countries accumulating large reservesfinanced by China and other countries accumulating large reserves
One example: Responding to the financial crisis and Great One example: Responding to the financial crisis and Great RecessionRecession
Emerging marketsEmerging markets
USAUSA
Euro AreaEuro Area
Sept-2008Sept-2008
MSCI equity price indexes, January 2005=100MSCI equity price indexes, January 2005=100
The bubble bursts… financial panic… and the Great The bubble bursts… financial panic… and the Great RecessionRecession
Source: World Bank, Source: World Bank, Global Economic Prospects,Global Economic Prospects, 2009 2009
So…So… 30% of household wealth wiped out30% of household wealth wiped out $4 trillion of equity worldwide$4 trillion of equity worldwide Pension funds obliteratedPension funds obliterated Unprecidented contraction in consumptionUnprecidented contraction in consumption
Split on Recession Cure, Leaders Try 3 Approaches Split on Recession Cure, Leaders Try 3 Approaches
The crisis required a multilateral response… and the G20 The crisis required a multilateral response… and the G20 leaders strive to coordinate actions…leaders strive to coordinate actions…
G20 Summits G20 Summits Nov. 15Nov. 15April 2 April 2 Sept 23Sept 23
Fighting this CrisisFighting this Crisis• Global fiscal stimulusGlobal fiscal stimulus• Coordinated monetary policyCoordinated monetary policy• Restraining protectionismRestraining protectionism• Enhanced IMF resourcesEnhanced IMF resources
Preventing the Next OnePreventing the Next One• Managing systemic riskManaging systemic risk• Oversight of credit rating agenciesOversight of credit rating agencies• Enhanced disclosure/common accountingEnhanced disclosure/common accounting
Reflecting New Realities/Enhancing LegitimacyReflecting New Realities/Enhancing Legitimacy• G-20 supersedes G-8…?G-20 supersedes G-8…?• Developing countries in Global Stability ForumDeveloping countries in Global Stability Forum• Reforms of the IMF and WBReforms of the IMF and WB
Liquidity in global inter-bank markets have virtually Liquidity in global inter-bank markets have virtually returned to normal conditionsreturned to normal conditions
LIBOR-OIS LIBOR-OIS spreadspread, key policy and regulatory responses, key policy and regulatory responses
Oct G-7 Oct G-7 meetingmeeting
Pre-Pre-crisiscrisisUSD USD
averageaverage
dollardollareuroeuro
Source: World Bank, DEC Prospects GroupSource: World Bank, DEC Prospects Group
Equity markets have recouped between a third and a Equity markets have recouped between a third and a half of their losses…half of their losses…
MSCI indices of EM Asia, EM Europe, Latin America and Mature MSCI indices of EM Asia, EM Europe, Latin America and Mature Markets (Jan 1, 2007=100)Markets (Jan 1, 2007=100)
Source: World Bank, DEC Prospects GroupSource: World Bank, DEC Prospects Group
Trade, devastated in early phases, is a leading sector outTrade, devastated in early phases, is a leading sector out
Export volumes, seasonally adjusted, annual percentage changeExport volumes, seasonally adjusted, annual percentage change(rolling quarterly average over previous quarter)(rolling quarterly average over previous quarter)
Source: World BankSource: World Bank
Industrial production has turned around
Source: World Bank, DEC Prospects Group.Source: World Bank, DEC Prospects Group.
OECDOECD
DevelopingDeveloping
Industrial production, percentage change (3m/3m, saar)Industrial production, percentage change (3m/3m, saar)
WorldWorld
Developing countriesDeveloping countries
High-income countriesHigh-income countries
GDP annual growth rates (%)GDP annual growth rates (%) ForecastForecast
Recovery is beginning… with developing countries leading Recovery is beginning… with developing countries leading
% change% change
??
Source: World Bank, Source: World Bank, Global Economic Prospects,Global Economic Prospects, 2009, GEP Update, 2009, and JP Morgan 2009, GEP Update, 2009, and JP Morgan
JPM: 5.8JPM: 5.8
JPM: 2.7JPM: 2.7
4.44.4
1.61.6
But damage is severe – and it may take years to regain lost output (Reinhart-Rogoff, 2009; Cecchetti, et al 2009)
Repairing the damage: Policy issuesRepairing the damage: Policy issues
Providing adequate Providing adequate support to unemployed support to unemployed workers – and to the poor will be workers – and to the poor will be crucial crucial ILO: 40-60 million more workers will be unemployed in 2009 than in 2007ILO: 40-60 million more workers will be unemployed in 2009 than in 2007 Employment usually takes twice as long to recover as output (Reinhart Employment usually takes twice as long to recover as output (Reinhart
and Rogoff, 2002) (Claessens, et al, 2008)and Rogoff, 2002) (Claessens, et al, 2008)
Maintaining open markets Maintaining open markets during periods of high unemployment will be critical during periods of high unemployment will be critical to sustaining trade-led growthto sustaining trade-led growth
Reallocating Reallocating global balances global balances and managing exchange rate realignment and managing exchange rate realignment requires continued (and better) G20 coordinationrequires continued (and better) G20 coordination
Financing widening Financing widening fiscal deficits fiscal deficits – necessary to maintain health and social – necessary to maintain health and social spending -- could prove difficult problematicspending -- could prove difficult problematic
Source: Consensus ForecastSource: Consensus Forecast,, October 2009 October 2009Note: The data represent the key budget balance, which differs across countries. For example, for Argentina, the balance refers to the consolidated non-financial public sector budget; for Brazil, it refers to the nominal public sector borrowing requirements while for Chile, it represents the general government budget balance.
Financing fiscal stimulus programs will pose serious Financing fiscal stimulus programs will pose serious challenges -- as will unwinding deficits in out-years challenges -- as will unwinding deficits in out-years
……global borrowing from private markets is still global borrowing from private markets is still expensive… and may remain so for some timeexpensive… and may remain so for some time
Emerging-market bond spreadsEmerging-market bond spreads
Source: World BankSource: World Bank
Before Lehman BrotherBefore Lehman Brother
In the beginning…• born after World War II as the born after World War II as the International Bank forInternational Bank for Reconstruction and Reconstruction and Development Development
• to help countries reconstructto help countries reconstruct after the war -- focus on after the war -- focus on infrastructure and industry infrastructure and industry
• part of the extended UN family, but part of the extended UN family, but separate governance structureseparate governance structure
• owned by 185 countries with votes owned by 185 countries with votes according to paid in according to paid in capitalcapital
• US largest shareholder (16%)US largest shareholder (16%)
• Japan now second largest (15%)Japan now second largest (15%)
• 25 Executive Directors25 Executive Directors
What is the role of the World Bank in the crisis- and in the What is the role of the World Bank in the crisis- and in the multilateral system of governance?multilateral system of governance?
The World Bank’s role…The World Bank’s role…
Provide financial resources for investmentProvide financial resources for investment directly through loansdirectly through loans indirectly – guarantees and insurance indirectly – guarantees and insurance
Provide knowledge about what works in poverty Provide knowledge about what works in poverty reduction and what doesn’treduction and what doesn’t through policy advicethrough policy advice technical assistancetechnical assistance bringing people together bringing people together
Provide “public goods”Provide “public goods” Data and comparative indicators of policy (trade, Data and comparative indicators of policy (trade,
finance, doing business, debt) finance, doing business, debt) Research into what works and what doesn’tResearch into what works and what doesn’t Advocacy of global policies that affect poor Advocacy of global policies that affect poor Global environmental work and infectious diseases Global environmental work and infectious diseases
International Bankfor Reconstruction
and Development (IBRD)
InternationalDevelopment
Association (IDA)
InternationalFinance
Corporation (IFC)
MultilateralInvestment
Guarantee Agency
International Centerfor the Settlement ofInvestment Disputes
THE WORLD BANK GROUP
• Supports middle-income countries
• Provides loans at AAA terms plus cost spread
• Funded through bonds, backed by shareholder capital
• Supports the world’s poorest countries
• Provides soft-loans and grants plus debt relief
• Replenished every 3 years by donors and through IBRD income
• Supports the private sector in developing countries
• Provides loans and equity investments
• Funded through bonds, backed by shareholder capital
• Supports investors in developing countries
• Provides political risk insurance
• Backed by shareholder capital
• Offers mediation and arbitration services for investors in developing countries
The World Bank Group comprises five organizations The World Bank Group comprises five organizations with differing instruments…with differing instruments…
The World Bank is deploying various instruments to The World Bank is deploying various instruments to respond to the crisisrespond to the crisis
IBRDIBRD: commitments of $100 billion over the next three years: commitments of $100 billion over the next three years
IDAIDA: Front load commitments from US$42 billion: Front load commitments from US$42 billion
IFC:IFC: about $30 billion over the next three years about $30 billion over the next three years
Expanded Expanded trade financetrade finance program from $1.5 billion to $3.0 billion over a program from $1.5 billion to $3.0 billion over a three years to benefit participating banks based in 66 countriesthree years to benefit participating banks based in 66 countries
Bank Recapitalization FundBank Recapitalization Fund to recapitalize distressed banks for US$1 to recapitalize distressed banks for US$1 billion over three years ; Japan has invested US$2 billion to the fund. billion over three years ; Japan has invested US$2 billion to the fund.
Infrastructure Crisis FacilityInfrastructure Crisis Facility is to provide roll-over financing and help is to provide roll-over financing and help recapitalize existing, viable, privately-funded infrastructure projects facing recapitalize existing, viable, privately-funded infrastructure projects facing financial distress with investments of US$300 million to mobilize between financial distress with investments of US$300 million to mobilize between US$1.5 billion and US$10 billion from other sources.US$1.5 billion and US$10 billion from other sources.
Multilateral Investment Guarantee AgencyMultilateral Investment Guarantee Agency planned support to projects in planned support to projects in Ukraine, Russia, and Eastern Europe, and Africa.Ukraine, Russia, and Eastern Europe, and Africa.
World Bank Group reforms for the 21World Bank Group reforms for the 21stst Century Century Structural reforms Structural reforms of the World Bank Group:of the World Bank Group:
Voice and participation, voting power of developing countriesVoice and participation, voting power of developing countries Governing bodiesGoverning bodies Leadership selectionLeadership selection Management accountabilityManagement accountability
Strengthening the financial resource base Strengthening the financial resource base of the World Bank Group to of the World Bank Group to address IBRD/IFC capital constraints:address IBRD/IFC capital constraints: August 2009 load price increase, generating $2 billion by 2019August 2009 load price increase, generating $2 billion by 2019 Release shareholders’ national currency paid-in capital ($0.5-2 bn)Release shareholders’ national currency paid-in capital ($0.5-2 bn) Tight budget disciplineTight budget discipline Possible increase to expand developing country “voice”Possible increase to expand developing country “voice”
Recapitalization Recapitalization of the World Bank Group:of the World Bank Group: General Capital IncreaseGeneral Capital Increase Selective Capital Increase to expand developing country “voice”Selective Capital Increase to expand developing country “voice”
Source: Zedillo Commission Report (2009), Source: Zedillo Commission Report (2009), Repowering the World Bank for the 21Repowering the World Bank for the 21stst Century Century, Washington DC: World Bank Group., Washington DC: World Bank Group.
A selective capital increase linked to “voice” would A selective capital increase linked to “voice” would expand developing countries’ voting sharesexpand developing countries’ voting shares
First phase of “voice” reforms (approved in January 2009):First phase of “voice” reforms (approved in January 2009): New chair for Sub-Saharan Africa, with 3 seats on the Bank’s 25 member BoardNew chair for Sub-Saharan Africa, with 3 seats on the Bank’s 25 member Board Increase in developing countries’ shares in IBRD to 44.1 % and beyond that in IDAIncrease in developing countries’ shares in IBRD to 44.1 % and beyond that in IDA Amending the World Bank’s Articles of Agreement by early 2010Amending the World Bank’s Articles of Agreement by early 2010 Selection of WBG President through merit-based, transparent and open processSelection of WBG President through merit-based, transparent and open process
Second phase of “voice” reforms (underway):Second phase of “voice” reforms (underway): Review of basic principles, criteria and mechanism for realigning IBRD Review of basic principles, criteria and mechanism for realigning IBRD
shareholdingshareholding Additional increase in developing countries’ voting power by at least 3%, on top of Additional increase in developing countries’ voting power by at least 3%, on top of
the 1.46% from the first phase, bringing their total share above 47%the 1.46% from the first phase, bringing their total share above 47% A Voice Review by the IFC Board to be discussedA Voice Review by the IFC Board to be discussed
Conclusion: Reforming the multilateral system requires Conclusion: Reforming the multilateral system requires financial responses… and institutional changesfinancial responses… and institutional changes
Reviving growth requires access to non-inflationary sources of financeReviving growth requires access to non-inflationary sources of finance Financing growth in middle-income countries requires Financing growth in middle-income countries requires capital increases capital increases for the for the
multilateral development banksmultilateral development banks Financing growth in low-income countries requires Financing growth in low-income countries requires increases in increases in concessional concessional
development assistance, development assistance, particularly replenishment of International particularly replenishment of International Development Association (IDA-16)Development Association (IDA-16)
Incorporating new powers into the multilateral system… Designing fora like the G-Incorporating new powers into the multilateral system… Designing fora like the G-20, the World Bank board, or the WTO to bring countries together around 20, the World Bank board, or the WTO to bring countries together around cooperative collective actions to solve real problemscooperative collective actions to solve real problems
Using the World Bank, among other multilateral institutions, in global cooperation Using the World Bank, among other multilateral institutions, in global cooperation to fight poverty, improve the environment, and raise living standardsto fight poverty, improve the environment, and raise living standards
References and Further ReadingReferences and Further Reading
Cecchetti, Stephen, Marion Kohler, and Christian Upper “Financial crises are different! Cecchetti, Stephen, Marion Kohler, and Christian Upper “Financial crises are different! Refining the Reinhart-Rogoff estimates” EUVox 28 October 2009Refining the Reinhart-Rogoff estimates” EUVox 28 October 2009
Consensus ForecastsConsensus Forecasts, October, 2009., October, 2009.
Reinhart, Carmen and Kenneth Rogoff (2009) Reinhart, Carmen and Kenneth Rogoff (2009) This Time is Different This Time is Different Princeton: Princeton: University PressUniversity Press
Roubini, Nouriel, Roubini, Nouriel, Roubini Global EconomicsRoubini Global Economics www.rgemonitor.com www.rgemonitor.com
Sachs, Jeffrey Sachs, Jeffrey The Common Wealth: Economics for a Crowded Planet, 2008 The Common Wealth: Economics for a Crowded Planet, 2008
JP Morgan, Global Data Watch, October and November 2009.JP Morgan, Global Data Watch, October and November 2009.
World Bank, World Bank, Global Economic Prospects, 2007 Managing the Next Wave of GlobalizationGlobal Economic Prospects, 2007 Managing the Next Wave of Globalization, , Washington: World BankWashington: World Bank
World Bank, www.worldbank.org/prospectsWorld Bank, www.worldbank.org/prospects
Zoelick, Robert “The New Multilateralism” Speech to Brookings Institute, October 2008Zoelick, Robert “The New Multilateralism” Speech to Brookings Institute, October 2008
Richard NewfarmerRichard Newfarmer
Special Representative to the WTO and UN Special Representative to the WTO and UN
World BankWorld Bank
Geneva, SwitzerlandGeneva, Switzerland
The Changing Nature of Multilateralism:The Changing Nature of Multilateralism:
the Role of the World Bankthe Role of the World Bank
November 24, 2009November 24, 2009