Advancing Reforms at the World Bank with a Capital Increase

April 20, 2018 By Sung Lee

As the World Bank’s Spring Meetings get underway, members of the Bank will consider a request to provide a capital increase for the International Bank for Reconstruction and Development (IBRD) to support financing for economic growth in middle-income and creditworthy low-income countries. The U.S. is expected to support the proposal which will maximize financing for development in return for reforms that will prioritize lending to poorer countries and revise lending practices to upper middle-income countries, like China, that have ample economic capacity to borrow from capital markets.

The proposed increase reflects dramatic shifts in the developing world where IBRD operates: sustained economic growth over recent decades has led to an increase in middle-income countries and a subsequent decrease in low-income countries. Yet reaching the UN’s Sustainable Development Goals to end extreme poverty will require an estimated $2.5 trillion investment. As World Bank President Jim Kim has said, “with enormous development needs and rising aspirations, demand is overwhelming.”

Return on Investment

Since the creation of the World Bank, the $19 billion dollars invested into the IBRD and the International Finance Corporation by all World Bank member countries has generated tremendous returns – these limited funds have leveraged more than $900 billion in financing for recipient countries, $50 billion in reserves, and $28 billion in investments in low-income countries through the International Development Association (IDA) account.

Investments from the IBRD have also helped build new markets. In Peru, IBRD’s $20 million loan in 2010 helped provide farmers with reliable water sources to boost agricultural production. Nearly 19,000 farmers between 2011 and 2016 gained reliable access to water, increasing their rye grass and maize yields by 100 and 177 percent, respectively. These investments have significantly increased farmers’ incomes to drive economic growth, partly contributing to Peru’s transformation into one of America’s key strategic allies and economic partners in Latin America. Between 2006 and 2016, U.S. goods exports to Peru increased by nearly 175 percent to $8 billion.

Why Middle-Income?

This capital increase request follows recent Congressional approval of a capital increase for the World Bank Internal Development Association (IDA) account— supporting low-income countries. While some have argued against providing assistance to middle-income countries, the concept of “middle income” often does not reflect the challenges and opportunities these countries face.

Today, over 70 percent of the world’s poor – nearly a billion people – live in middle-income countries. Many of these nations face violence and fragility. Without America’s commitment to increase IBRD’s capacity to fund social and economic development projects, conflicts in vulnerable middle-income countries could wipe out development progress and potentially require costly U.S. intervention. Syria was quite recently a middle-income country with a GDP of $67.5 billion. Today, the nation lies in ruin with 80 percent of its population living in poverty.

Helping to build stability in middle-income countries like Ukraine and Jordan – America’s key strategic allies – also advances U.S. national security interests. In the aftermath of Ukraine’s political and economic crisis in 2013, the World Bank’s $5 billion loan helped the government advance much need policy reforms, contributing to consecutive years of moderate economic growth. In Jordan, IBRD’s $50 million loan helped provide critical health services to 3.5 million people.

China Challenging U.S. Global Leadership

The Administration’s support for the capital increase comes against the backdrop of China’s expanding global presence in the countries where the IBRD operates. China has already committed over $1 trillion to its “One Belt One Road” initiative and is leveraging the newly created Asian Infrastructure Investment Bank – an alternative to the United States-led World Bank and the Asian Development Bank – to grow its sphere of influence.

Members of Congress also recognize the importance of investing in the World Bank to ensure America’s global influence. At last week’s hearing, Representative Dutch Ruppersberger (D-MD) said to Treasury Secretary Mnuchin, “We see budget proposals that pull back from our investments in multilateral development banks. And if we continue to pull back, China will continue to step right in and fill the void.” Supporting IBRD’s capital increase, along with the proposed reforms, is a smart investment that will strengthen U.S. global leadership in the face of rising competition, advance inclusive growth and stability, and lead to a more secure and prosperous world.