Emerging-Market Drift From World Bank to Test Kim

World Bank Nominee Jim Yong Kim
Jim Yong Kim, president of Dartmouth College. Photographer: Andrew Harrer/Bloomberg

As Jim Yong Kim takes over as president of the World Bank, he will find himself at the helm of a poverty-fighting organization where large, emerging-market members no longer need it to finance much of their development.

Instead, it will be up to Kim to keep the bank relevant to China, Brazil and other nations that have access to private investors. With some countries even becoming rival lenders in Africa and Latin America, one of Kim’s main challenges is to keep them as clients and contributors, said Nancy Birdsall, president of the Washington-based Center for Global Development.

“It’s no longer a question of the bank doing things for those countries,” said Birdsall, a former director of policy research at the World Bank. “It’s a question of how those countries will engage with the bank, not only as possible borrowers but as participants for strengthening the capital base of the bank, as participants in pushing for policy changes.”

Kim’s selection yesterday over candidates from Nigeria and Colombia extends a U.S. monopoly on the top job just as the share of emerging markets in the global economy increases. The 52-year-old physician said in a statement he “will seek a new alignment of the World Bank Group with a rapidly changing world,” fostering an institution that “amplifies the voices of developing countries.”

Brazil, Russia, India and China, the so-called BRIC group of major emerging markets, will account for 23 percent of the world’s output in 2016, up from 19 percent in 2011, according to a report by Grant Thornton International Ltd. The share of Group of Seven countries, which includes the U.S., Germany and Japan, will decline to 44 percent from 48 percent in the same time frame, it said.

Diverging Interests

The two groups can have diverging interests, with the richer nations putting more emphasis on environmental or social safeguards, said Whitney Debevoise, a former U.S. executive director at the World Bank.

“There’s a different perspective for example on coal-power projects,” he said.

Kim, who was born in Korea and grew up in the U.S., said his experience will help him bridge such differences at the lender, which committed $57 billion last year on everything from building roads to taking stakes in companies in emerging economies. He takes office at the World Bank July 1.

In a statement to the board last week, he pledged to “bring a global orientation to my leadership, helping to build consensus to advance the mission of the World Bank.”

Retaining Borrowers

He needs to retain borrowers. Part of the bank’s income comes from the difference between the interest the bank charges customers and the interest it pays selling bonds on financial markets.

Clients include Turkey, which last month obtained a $600 million, 15-year loan to promote clean technology investments and improve energy security. These arrangements are attractive as they combine long-term financing at low interest rates with the expertise of World Bank staff.

Still, they are dwarfed by private investment. Net disbursements by the World Bank to middle-income governments such as China were less than $8 billion in the year through June. By contrast, net private inflows to emerging markets reached $910 billion in 2011, according to estimates by the Washington-based Institute of International Finance.

Borrowers can also be driven away by the safeguards and bureaucracy of the bank, said Nigerian Finance Minister Ngozi Okonjo-Iweala, who competed against Kim and is a former managing director at the bank.

‘Lost Interest’

“Middle-income countries are no longer prepared to wait,” she said in Washington last week. At times the bank has “to certify and recertify over and over again that something is right and then you have to review it and it takes 10 months and a year, and by then the country has lost interest,” she said.

That’s the case with Ghana, which signed a $1 billion lending agreement with China Development Bank Corp. as part of the biggest loan in the country’s history.

“China has emerged as a significant source of credit to Africa, traditionally our partners have been the World Bank and the IMF,” Vice President John Dramani Mahama said in an interview, referring to the International Monetary Fund. “The process for accessing World Bank and IMF credit has been unfortunately quite tiresome and comes with a lot of strings.”

A plan under study by Brazil, Russia, India, China and South Africa to create their own development bank may be a reflection of that frustration, Center for Global Development’s Birdsall said.

Brazil’s national development bank alone in 2011 made 139.7 billion reais ($75.6 billion) worth of loans.

China’s Lending

Already, China’s lending to Latin America in 2010 was more than the World Bank, the Inter-American Development Bank and the Export-Import Bank of the United States combined, according to estimates in a report published by the Inter-American Dialogue, a Washington-based, non-for-profit organization that seeks to build cooperation between Western Hemisphere nations.

One of Kim’s challenges will be to encourage emerging markets to contribute more to the World Bank and less through bilateral loans, said Bessma Momani, a political science professor at the University of Waterloo in Canada.

Robert Zoellick, the current World Bank president, has made it a point to have the bank keep close ties with large emerging markets. He appointed Chinese academic Justin Lin as chief economist in 2008 and the World Bank this year co-wrote a report on China’s economy with Chinese state researchers.

Largest Trading Partner

China is Africa’s largest trading partner and has signed agreements worth billions of dollars with governments on the continent, seeking natural resources to feed its economic growth in exchange for building roads and railways, and nurturing a market for its products. Chinese finance operates under a set of environmental guidelines that isn’t on a par with those of its Western counterparts, according to the Inter-American Dialogue report.

That makes for a delicate relationship between the two with efforts from the bank to make China “a more responsible lender,” said Debevoise, now a senior partner at Arnold & Porter LLP.

The bank may get to the point where it says, “if you don’t behave in Africa we’re not going to lend you anything more,’” he said. “But China can just say ‘fine we don’t care.’”

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