Speech
24 February 2009
"A Bank for the World: the role of the World Bank in responding to the financial crisis and building a better future"
Secretary of State for International Development Douglas Alexander's speech at Chatham House on 24 February 2009
First of all I’d like to thank Robin [Niblett – Director of Chatham House] for that warm introduction, and Chatham House for hosting this evening’s event.
We meet today in the shadow of a global financial crisis more serious than we have seen for generations.
We gather some six weeks before world leaders come to London for a summit to address the next stage of the global response to this global downturn.
We assemble two months ahead of the spring meetings of the IMF and World Bank taking place in Washington DC.
And for many of you in the audience this evening, I am aware that this meeting takes place after two days of meetings at Canada House, as part of Rights and Humanity’s Emergency Congress ahead of the London Summit.
So I want to take the opportunity provided by this timely event to set out:
- The global economic context in which we meet, and the events that led to the financial crisis;
- The impact that the economic downturn is already having in poor countries, and how this might develop in the weeks and years ahead;
- How as a global community we must respond to the real threat that this financial crisis is already becoming a human crisis in the world’s poorest countries;
- And how we must respond to this crisis by remaking our international institutions in order to better tackle the global inequalities that persist today.
On the final point I want to talk with specific reference to the World Bank – an institution through which around one fifth of all aid to the poorest developing countries is channelled, and which is vital to both our crisis response, and tackling the persistent problem of global inequality.
So taking each of those issues in turn, let me start with a brief analysis of the scale and origins of the current financial crisis.
The scale and origins of the financial crisis
As the conversations last month at Davos reflected, in the last five months, $30 trillion worth of wealth has disappeared globally. That is more than twice the annual GDP of the United States, and around half of the annual GDP of the entire world.
Many forecasters are now expecting the world economy as a whole to contract for the first time since the Second World War.
The Euro area has been in recession since last April. The United States economy for a year. In Germany, output has shrunk by around 1 per cent in the last six months alone. In Japan, output shrank by more than three per cent in the last three months of last year.
Here in the UK, as we’re all familiar with, the Governor of the Bank of England has described this as the greatest financial crisis since the first world war, and the Bank has cut interest rates to their lowest level ever.
This downturn is unlike any we have seen for generations in both its speed and its scope. It is worth examining therefore just how it came about.
The financial crisis, by common consent, broke in summer 2007 against a backdrop of strong global economic growth. That growth had been fuelled by a ‘financial superhighway’, if you like, linking east and west – which saw the huge savings of the emerging economies in Asia, Russia and the Middle East invested in the West.
This influx of investment increased the price of assets and gave rise to ever cheaper credit, as banks gained the confidence to lend more against the collateral of rising property prices.
But when the so-called ‘sub-prime’ borrowers in the United States started falling behind on their mortgage payments, the holders of these mortgage-backed securities started to question just how exposed they were to the increased risk of default on hundreds of billions of dollars in ‘sub-prime’ loans.
And as they looked closer, those institutions found they could not even quantify their level of exposure because of the proliferation of complex securities and derivatives.
First designed to spread risk, these derivatives in fact increased the systemic risk inherent with bad debt – firstly by fooling lenders into thinking they had avoided such risks altogether, and secondly by reducing transparency and making it unclear just how exposed individual banks were.
Banks announced over a half a trillion dollars of sub-prime and related losses, but the growth in securitisation made it unclear who would bear the cost at the end of the chain.
The failure of Lehman Brothers in September led to a collapse in confidence, and almost every company or institution pulled out deposits from banks perceived as even marginally at risk.
That in turn brought the global financial system to the brink of collapse, sparking the worst global financial crisis for generations.
Yet for many commentators, one question persisted beneath the headlines – would the financial crisis spread beyond the inter-linked economies of the developed world to encompass emerging and developing economies?
The impact on poor countries
For the increasing openness of the global economy had given rise to astonishing growth in East Asia – growth that helped some 500 million people to lift themselves out of poverty since 1990.
Those emerging markets at first seemed resilient to the slow-down affecting developed economies, and commentators asked whether India and China had successfully ‘de-coupled’ from the G7 economies.
But the events of last September led to a wider collapse in economic confidence internationally, leading to sharp falls in trade, production and investment around the world. The developing countries, though less affected by the immediate fall-out of the credit-crunch, are more vulnerable to the second wave of what has been called a ‘once in a century credit tsunami’.
In the poorest countries, this is a crisis upon crisis. In addition to the perennial hardships faced by people living in extreme poverty, the food and fuel crises of last year pushed a greater number of people in developing countries to the brink.
We estimate that the hike in oil prices last year pushed around 25 million people into poverty. The food price increases of the last year were estimated to have trapped – at their peak – perhaps as many as 130 million people in poverty, causing as many as 40 million children to suffer malnutrition.
Now, as the financial crisis hits every economy around the world, poor countries are finding that every source of their development finance – remittances, export and commodity demand, aid and capital flows – are now being affected.
Remittances are starting to fall - as the financial crisis bites in the west, people are finding it harder to send money back home to relatives.
Demand for exports from developing countries is falling and trade finance is expected to decline by well in excess of $25 billion this year alone.
The International Labour Organisation predicts that some 50 million more people around the world will be unemployed in 2009 compared to 2007 – the majority of them in developing countries.
And as institutional investors around the world retreat from risk, we are seeing what could be the biggest slump in capital flows to emerging countries in history. Indeed the Institute of International Finance forecasts that there will actually be a net outflow of bank funds from developing countries this year, as repayment of debt overtakes new lending.
The combined effect then is that by the end of next year we could see some 90 million more people living in extreme poverty as a result of this financial crisis.
And what is the human impact of these apparently impersonal statistics? Recent IMF research shows that as growth falls, efforts to reduce infant mortality will suffer – indeed they estimate that as many as 2.8 million extra children may die between now and 2015 if the crisis persists.
But this is not tomorrow’s crisis. Offices of my department around the world are reporting the impact that developing countries are feeling right now. Nearly half of all China’s toy makers are reported to have closed in just the last year. In Cambodia, as many as thirty garment factories have been forced to close in the last few months alone. In the DRC, as many as 300,000 mine workers are estimated to have already lost their jobs as demand for commodities falls.
And in the Indian state of Gujarat, dozens of diamond workers are reported to have committed suicide over recent months as the state’s diamond industry has sunk into depression, with exports to the US falling by half.
As developing country governments have less money available to them they will be less able to invest in infrastructure, in education and in health care – the services their citizens so desperately need at these times of uncertainty.
And as families have less money, they are being forced to take the toughest of choices. In Liberia, spending on health-care has fallen by a sixth compared to pre-crisis levels. As women lose their jobs in the Bangladeshi garment industry, children are being pulled out of school to earn money for the family. In many countries women and girls are being hardest hit by this crisis.
It is clear therefore that beneath this financial crisis lies a human crisis, and we need a coordinated global response to this crisis to ensure that the coming years do not become the ‘lost years’ in the global fight against poverty.
That is why we are urging donors to reaffirm our shared commitment to the Millennium Development Goals and meet our aid pledges. Developing countries must ensure that they continue to prioritise the basic services that their citizens need. And NGOs must continue their vital work to provide both development and humanitarian assistance.
And, perhaps most relevantly for today, the International Financial Institutions have a crucial role to play, in providing more, better and faster financing to help protect investments in health and education, and in stimulating economies and creating jobs through support to infrastructure and trade finance.
The role of the World Bank in responding to the immediate crisis
Most central among those international financial institutions to the task of poverty reduction is the World Bank – through which around one-fifth of global aid to the poorest countries is channelled, and which also lends tens of billions of dollars to middle-income countries.
And the Bank has an impressive track record in tackling poverty:
- Thanks to funding provided by the Bank’s International Development Association, more than 65 million more children have attended school, and some 60,000 kilometres of road have been built or repaired in just the last 5 years.
- The Bank has shaped and implemented global initiatives - from finding solutions to the problem of unpayable debt through bilateral and multilateral debt initiatives to managing the resources for the Fast Track Initiative for Education and the Global Fund for Aids TB and Malaria.
- And in the past year, the World Bank has led the world’s response to the global food crisis, establishing the Global Food Response Programme last May, which has since provided some $500 million of food and other aid in some 30 countries.
The Bank has also been playing a vital role in helping developing countries to respond to the global economic crisis, providing an oasis in the credit desert for certain middle-income countries.
But in these extraordinary times, the world’s poorest people need the World Bank to take extraordinary measures. I don’t believe the Bank should be reckless, or short-cut necessary due diligence. But it must take rapid action now to provide more, faster and better funding, and do more to help protect some of the world's most vulnerable people.
So what would that agenda for action look like?
More, faster, fewer restrictions
Firstly, the Bank should make more funding available: it has already said that it is willing to almost triple lending to middle-income countries to $35 billion this year, and $100 billion over three years.
Yet as capital markets turn away from emerging countries we need to be prepared for the eventuality that even this will not be enough. The Bank needs to urgently establish a contingency plan for how it will provide more resources. Through its private sector arm, the International Finance Corporation, it should continue to lead the way with other institutions in securing a substantially expanded trade finance facility for developing countries, and in ensuring its private sector investments continue in poor countries.
Shareholders have a responsibility to ensure that the Bank has sufficient capital for lending. Both shareholders and the Bank management need to ensure that resources that it already has are being used to the greatest effect for poor countries – which could include using loans to boost its concessional resources for those low income countries with sustainable levels of debt.
Secondly, the Bank could do more to make money available more quickly, as it did in response to the global food crisis. It needs to do this again, now and throughout the economic crisis, because developing countries with an urgent need today need funds to start flowing this year – not next year or even the year after. If most of the $100bn available for the next three years is needed quickly then it should be provided this year.
It usually takes the Bank eighteen months to process its most common loan – with each loan subject to around thirty Bank polices and procedures. Bank shareholders need to encourage the Bank to cut internal red tape and should agree to stop micro-managing the detail of every Bank project and instead focus on the key task of managing risk.
And thirdly, I believe that the Bank’s board should move quickly to remove two specific restrictions on its grants and loans. The first limits the amount it can lend to any one country. India has now reached the limit for lending – yet of course is home to more people living in extreme poverty than the whole of sub-Saharan Africa.
The second such condition is a frankly arbitrary 30 per cent ceiling on the proportion of funding that can be provided to the poorest countries as budget support. As finance dries up, developing country governments are likely to face ever tougher choices in balancing their budgets – and we need the Bank to be able to provide the most effective assistance in each case.
The World Bank also needs to ensure that it learns the lessons from previous crises. By the Bank’s own admission, it did not do enough in previous crises to help and protect the poorest.
A recent Bank report, reviewing responses to past crises, found that too often, disagreements with the IMF, a tendency to over-load loans with conditions and a lack of contingency planning meant that – and I quote directly - "poverty did not get sufficient attention".
This was an indictment of the Bank’s past performance in tackling global poverty. The Bank and its shareholders now have a responsibility to build on recent progress and ensure that the response to this crisis – greater, arguably, than any the Bank has dealt with in its sixty year history – is more effective than its response in the past.
Conditionality needs to be appropriate, and this crisis offers the Bank a chance to take a different approach to that which characterised its response to past crises. I am looking to the Bank to build on its recent commitments to limit the number and type of conditions its uses, recognising that the crisis did not originate in developing countries.
But at base, the central lesson of previous crises is that the poorest people in developing countries suffer most and that not enough was done to help them. They are least able to protect themselves, have the least assets to tide them over difficult times, and have least access to credit.
Our response to this crisis must be different. We must do more to help poor people, so that they can emerge from this crisis with their livelihoods, their assets and indeed their health. And we must respond to the particular challenges facing women and girls.
Rapid Social Response Fund
We have seen that where countries responding to the food crisis have provided such safety nets for their most vulnerable citizens, it has helped to protect them from the worst of the crisis. In Bangladesh, as many as two-thirds of families were forced to take their children out of school in the aftermath of the food crisis – but in areas where school feeding programmes were in place, the drop out rate in primary school was significantly lower.
From Senegal to Lesotho to Indonesia, many developing countries are providing a safety net in response to the food crisis. But as the development finance available to these countries falls as a result of the global downturn, they will find it increasingly difficult to finance these social protection programmes. And many countries have no such programmes at all.
So I welcome the leadership that Bob Zoellick has given to make sure the Bank provides more assistance of this kind. And I strongly welcome the Bank’s decision to launch a new Vulnerability Financing Facility to help mobilise more funding to protect the poorest.
The UK is supporting the creation of a Rapid Social Response Fund as part of this work, to help developing countries to provide social protection for the poorest and most vulnerable – not just for this but also future crises. Such a fund could be managed by the World Bank, but should be accessible for the UN or directly by countries to give urgent help in the form of nutrition programmes, school meals, maternal and infant health care, pensions and public works schemes that provide employment and a wage.
Global Poverty Alert
We also need a better early-warning system to ensure that we can better respond to the need on the ground, in the same way that the Prime Minister has called for an early warning system for the economy at the IMF.
That doesn’t exist right now, and aid agencies around the world are making decisions based frankly on a patchwork of information from donors, international institutions, NGOs and developing country governments. We need to pull this all together, to give a coherent, up to date picture of the need on the ground – so that we can then best and most efficiently respond.
That is why we will be seeking agreement at the London Summit for a Global Poverty Alert to capture real-time information – on how many children are being pulled out of school, how many people are arriving at emergency feeding centres – information on which we can act in time to make a real difference.
Securing these reforms will, I believe, be vital to ensuring that the global response to the economic downturn is effective in protecting the poor and especially the poorest.
But at the same time as we respond to the current crisis, we must look beyond it.
Reforming the international system
For if this is truly the first global financial crisis of a global age, that global age has also brought other interdependencies, among them: resource scarcity; climate change and global inequality.
And as the financial crisis has shown, no country – no matter how prosperous – can confront these shared challenges acting alone. Collective international action is required, for which we need effective and shared international institutions that can protect our common interests and help us achieve our common objectives.
And that means international institutions that understand and respond to the interconnected nature of these challenges at the start of the twenty-first century. All institutions, including the World Bank, must recognise the centrality of climate change to their work. Climate change has the potential – alone - to reverse the progress we have made in the last decade towards meeting the Millennium Development Goals.
Today the international system is not flexible enough to respond to such new challenges quickly and effectively. And it reflects too much the balance of powers as it stood in the middle of the last century – rather than a world of shared interest at the beginning of this century.
We must respond to this crisis by remaking our international institutions for the challenges we face today. Challenges that have been postponed for too long, that were once seen as long-term, are now immediate and must be dealt with.
So let me, in the time remaining, sketch out for you some of the reforms that I suggest would allow the World Bank to be seen as a more legitimate, more credible and therefore more effective institution for the future.
Reforming the World Bank
Underpinning every aspect of the Bank’s ability to fulfil its mission is the need to make it more legitimate - firstly by increasing developing country voice, secondly by moving more of the Bank out of Washington, and thirdly by making the Bank more accountable itself.
Firstly then, and perhaps the most important issue for World Bank reform, is ensuring that it is in reality a true partnership.
And we have made a start. At the annual meetings in October, the UK helped to secure an extra seat on the board of Executive Directors for sub-Saharan Africa. And together with other shareholders I secured agreement on the importance of a selection process for the President of the Bank that is merit-based and transparent, with nominations open to all Board members. I believe that principle should now be applied to every multilateral bank.
That achievement last October shows the real potential to build a partnership among shareholders for fundamental reform. And it represents a significant step on the long but critical journey to modernising the Bank.
When the World Bank was established, those countries borrowing substantially from it – the countries of post-war Europe – had a major say in the running of the organisation. And today, in areas ranging from strategy, policy and budget to the detail of operational issues, the voice of the poorest must again be heard.
So we do look to the London Summit in April to recognise the need and agree the principles for continuing reform at the World Bank. And alongside the articulation of principles, we need a clear process for putting them into practice.
So I would propose that Governors of the Bank should have a substantive discussion at this year’s Annual meetings, based on those principles outlined at the London summit and the findings of the presidency-appointed Zedillo Commission. By next year’s Spring Meetings, we could then be in a position to reach agreement on a reform package which includes a more equitable allocation of votes between developed and developing members.
Let me suggest to you two further issues – beyond voting rights – which a reform process could and should address.
The Bank could strengthen its approach to partnership working by moving more staff and more decision making outside Washington DC. Many of us recognise the Bank needs to get closer to its clients. The main Board is too large for everyone to share perspectives and views at length. And too often, the members representing many of the poorest countries struggle to be heard.
I would therefore suggest that the Executive Board in Washington concentrates on strategy, accountability and results, and delegates oversight of much of the Bank’s country work to regional committees so that developing countries can have more say in the decisions that affect them most. My own Department, has undergone a process of devolving to the countries in which we work – to the benefit of our impact in those countries.
And finally, I would suggest that the reform process should address accountability of the Bank itself. I have great respect for Bob Zoellick, and I applaud his achievements as President in the last 18 months. He has been delivering real change.
Yet notwithstanding the considerable contribution of the current President, we need to look again at the balance of accountability and authority between shareholders and the management of the Bank.
For the present lack of accountability of the office of the President is not in the interests of the Bank. Indeed, if we can get the right reforms in order to make the Bank management more accountable, shareholders would I believe also be ready to give the Bank more freedom to deliver. Each of us must be willing to stand back from the detailed operations which are the Bank Management’s job and play an effective oversight role as strategic board directors, accountable to our domestic populations.
Closing remarks
The United Kingdom has been, and remains – I’m keen to express - a strong supporter of the World Bank. It has delivered real achievements for poor people around the world over last 60 years, and should have a central role in assuring our common future. But the reforms I have spoken about this evening need to be made in order that the Bank can best fulfil its mission in tackling global poverty in the changed circumstances I have described.
The responsibility for ensuring that happens rests not only with the management of the Bank but with the Governments that own it. For our part, the UK Government is pushing other shareholders to maintain their commitments on aid and continue to press the case for reform.
For in this crisis, the World Bank must again become the guardian of the poorest: supporting parents to keep their children in schools; supporting the elderly, and the unemployed so that they aren’t forced to sell the few possessions they have just to survive.
And this renewed commitment must be the driving force of the Bank, as we seek to renew its governance to recapture the spirit of collective purpose that led to its establishment almost sixty years ago.
Dean Acheson, one of the central figures at the Bretton Woods Conference in 1944 famously said that “the future comes one day at a time”. That is as true today as it was then.
And at the heart of that phrase lie two truths – that change is inevitable and that fashioning the future to the benefit of humanity requires our ongoing, indeed daily efforts.
I believe that we can, together build a more just, more sustainable and more equal future. And I believe that a more representative, accountable and effective World Bank can and must be a central part of those efforts. Thank you.
