Commentary / Japan

Japan and the World Bank's new direction

by Vinod Thomas

Contributing Writer

Japan, a major World Bank creditor and shareholder, has a keen interest in the future direction of the largest multilateral development bank. An imminent change at the helm is an opportunity for the bank to go beyond fighting poverty, and give top priority to confronting the dangers of climate change, widening income gaps and hindrances to open world trade — crucial concerns for Japan and the countries it works with.

But getting this agenda off the ground could be stymied if the U.S. administration’s nominee for the presidency, David Malpass, is put there mainly to slow climate action and check the rise of China.

The nomination of Malpass, an under secretary of the U.S. Treasury, reinforces the unwritten norm of an American national always heading the World Bank. This manner of selecting the chief of a multilateral agency — and a European leading the International Monetary Fund — is highly problematic, especially as these institutions advise countries to adhere to merit-based and competitive governance.

Be that as it may, the big question is what direction the bank will take. With $67 billion in lending in 2018, it is a dominant global lender for development. Japan joined the bank in 1952 as a client and borrowed for projects in sectors such as electric power, water and transport. The country hosted the World Bank/IMF annual meetings in 1964 when the Tokaido Shinkansen Line started operation (it had a $80 million bank loan). Japan hosted the annual meetings again in 2012, and has been source of development lessons in areas ranging from health insurance to disaster risk management.

Over the past quarter century, extreme poverty has fallen by well over half, with East Asia and especially China leading the decline. The bank’s support for trade and market reforms can take some of the credit for growth and poverty reduction. But it should also take some of the blame for the costly neglect of the environment and climate change that accompanied the charge for growth, especially in East Asia. A concern about Malpass, who has been a skeptic of climate actions, is that he may not drive the bank’s plan to lend $200 billion over the next five years to fight climate change.

The World Bank’s agenda might best be focused on global “public” problems such as environment damage, deficiencies in basic health and education, and gaps in infrastructure, where the private sector vastly underinvests.

Over the years the bank has also moved from the “Washington Consensus” of free market prescriptions that had ignored the complementary role of the state and market, and the importance of considering country-specific factors in policymaking. It is now being recognized that beyond reducing poverty, we must care for the environment and curb inequality. The fear is that this progress could be undone under the new nominee.

But to stay relevant, the World Bank needs to blend financing with its expertise in problems of rapid urbanization, alarming demographic shifts and rising income disparities. Improving governance is a guaranteed silver bullet for progress in these areas. Taking this direction will also help the bank to have a truly global clientele, including countries that have reached high income status.

But the nomination of Malpass, a critic of bank lending, especially to China, seems to be a part of the U.S. administration’s move to contain the bank’s development role. There is an argument for keeping higher income countries, including Japan and the United States, as clients, not necessarily for borrowing money, but for their role in directly sharing lessons learned.

There is a way to enable the World Bank to deal with the new wave of development challenges, regardless of who is at the helm as president. And that is by strengthening its board of directors with highly regarded development leaders from the member countries who can provide checks and balances to the presidency because of the intellectual and political weight they carry. If the U.S. administration’s choice is not to result in the bank primarily serving American interests, its independence needs to be strengthened. The board, comprising 25 directors, has increasingly been made up of bureaucrats from member countries. As a counterbalance to the president who chairs the board, there needs to be a strong board giving cohesive leadership.

The World Bank is a highly proficient organization staffed with deep skills in multiple disciplines in development. But for its interventions to be effective, the bank must refocus attention on critical global public problems such as climate change and disasters, blend its offering of long-term financing with knowledge and lessons learned, and broaden its country coverage to include low, middle and high-income countries.

Vinod Thomas is a former senior vice president at the World Bank.