WB calls for development finance to achieve SDGs

World Bank Group President Jim Yong Kim called for a fundamental rethinking of development finance to achieve global goals and meet people’s rising aspirations, and he outlined a set of guiding principles to crowd in private investment and maximize resources for the poor on April 11, 2017.

“We believe that everyone in the development community should be an honest broker who helps find win-win outcomes – where owners of capital get a reasonable return, and developing countries maximize sustainable investments,” Kim said. “There’s never been a better time to find those win-win solutions. The trillions of dollars sitting on the sidelines, earning little interest, and the investors looking for better opportunities should be mobilized to help us meet the exploding aspirations of people all over the world.”

Speaking at the London School of Economics ahead of the World Bank Group-IMF Spring Meetings, Kim stated that to encourage private investment, development finance must focus on systematically de-risking countries. These private sector investments also need to be made in a way that benefits poor countries and poor people, by combining private capital with technical expertise and knowledge about the countries and the economy.

“All development finance institutions should be working to crowd in private capital through a set of principles that will maximize resources and benefits for the poor,” Kim said. “It’s easy to talk about this approach, but it’s going to be very difficult to change the global development architecture to move in this direction.”

• First, for every project we support, we have to ask the question, ‘Can the private sector finance this on commercial terms?’ “That will mean that when something is commercially viable, we have to agree across the entire international development finance system – multilaterals and bilaterals – that we will help the government negotiate a private sector deal that provides value for money, ensures good governance, and adheres to environmental and social standards.”

• Second, we have to encourage upstream reforms. “With all of our projects, especially those that are not commercially viable because of market failures or perceived risks, we will work with the government on regulatory or policy reforms to make these projects commercially viable, whenever possible. Our goal isn’t just to de-risk projects; the goal is to de-risk entire countries.”

• Third, we have to use public or concessional finance in innovative ways to mitigate risk, and blended finance to support private sector investment. “Our new tools also include the $2.5 billion IDA Private Sector Window, part of our record $75 billion replenishment of IDA. Among other things, it includes a Risk Mitigation Facility to provide project-based guarantees without sovereign indemnity, and a Local Currency Facility to mitigate currency risk when markets are not yet developed.”

Kim stated, “If we’re successful at both creating markets and following these principles, countries can use scarce public resources to invest more in people, build resilience, and respond to crises. We need to keep searching for pathways to bring the private sector into these areas as well, but only if it’s in the best interest of everyone, especially those currently excluded from the benefits of development.”

However, Kim said there are sectors that can only be funded with public financing, where objectives cannot be met by the cost recovery requirements of commercial financing.

Kim explained an emerging phenomenon that puts new urgency behind the need to reimagine development finance: a global “convergence of aspirations.”

“Someone in Butare, Rwanda can Facebook message their cousin in Kigali and become immersed in detail about life 80 miles away. Both of them can talk every day with a friend studying in Paris, and learn about life 4,000 miles away. Depending on connectivity, which happens to be excellent throughout Rwanda, they can send emails, pictures, videos, snaps, tweets and texts back and forth at lightning speed.”

“Knowing exactly how everyone else lives, in their own countries and abroad, is leading to a convergence of aspirations.”

Kim described how World Bank economists, using data from the World Values Survey and the Gallup World Poll, recently looked at how people across the economic spectrum felt about their financial situation 15 years ago and today. “This research is preliminary, but here’s what we found: Your relative happiness depends on where you are in the income distribution. It also depends on how your income compares to your reference income – the income to which you compare your own.”

Looking at the data on satisfaction, researchers found that if an individual’s reference income goes up 10 percent, his or her own income has to go up at least 5 percent to reach the same level of satisfaction. And the data suggests that people’s reference incomes will become globalized, which will mean that in order for people to feel satisfied, they will need to see significant increases in their own income.

In Africa – home to 1.2 billion people – Kim noted that 226 million smart phones were connected to the internet at the end of 2015. By 2020, that number will triple, to three quarters of a billion. “We think that as more people connect to the internet, aspirations will continue to rise.”

“It’s important to remember, rising aspirations aren’t just for things that other people have; they’re demands for opportunities that too many don’t have,” Kim said. “And with high aspirations – embodied in the Sustainable Development Goals, and evident in every country I’ve traveled to – we have to move quickly to ensure that these aspirations don’t turn into anger, resentment, and ultimately even extremism and migration.”

Kim stated that, because of rising aspirations, “the task is much more urgent than we ever thought, and we have to move at a greater scale than we ever have before.”

Kim concluded his London School of Economics speech with a challenge “to ourselves - the World Bank Group, to the entire development community, and to all the future economic and political leaders in this room – to act with the speed and the scale that these times require, and fundamentally change development.”

“Aspirations are rising all around us; let’s see if we can raise our own to meet them.”