Amar Bhattacharya G24 Secretariat October 20th, 2009

1. What’s missing in response to the global financial crisis? Developing Country Perspectives Amar BhattacharyaG24 SecretariatOctober 20th, 2009

2. Response to the Global Financial Crisis • What has been done? • What remains to be done? • What is missing on the agenda?

3. Response to the Global Financial Crisis • Policy Actions • Institutional and Governance Arrangements

4. Response to the Global Financial Crisis Main Areas of Policy Action • Curbing the spread and impact of the crisis • From crisis to sustained recovery • Regulation of financial markets

5. Response to the Global Financial Crisis Curbing the spread and impact of the crisis • Unprecedented stimulus and heterodox measures resulting in “the largest and most coordinated fiscal stimulus ever undertaken” • Varied responses to financial distress • Macroeconomic and heterodox measures in larger EMEs • Stepped up support from IFIs to developing countries—but asymmetric in scale and scope

6. From Crisis to Recovery “Recovery and repair remains incomplete” • Concern about high unemployment and a jobless recovery • Sluggish private demand and downside risks • Tradeoffs on exit strategies • Compact on framework for strong, sustainable and balanced growth with a process of mutual assessment

7. Regulation of Financial Markets • New and higher standards for prudential regulation (more and better quality of capital, countercyclical buffers, minimum quantitative standards for liquidity, adoption of leverage ratios, reform and harmonization of accounting standards, reform of credit rating agencies) • Corporate Governance and Regulation (adoption of FSB guidelines on compensation, Basel principles for corporate governance of financial institutions, revision of OECD corporate governance principles)

8. Regulation of Financial Markets • Perimeters of regulation (all systemically significant financial institutions to be brought under the regulatory net, tighter prudential regulations and bank resolution plans for too-big-to-fail institutions, strengthening the robustness of the OTC derivatives market including through capital requirements and standards for central counterparties) • More coherent and effective national and cross-border supervision and crisis management • Peer review process

9. Missing or Less Addressed Elements • Legacy of debt and lack of debt restructuring mechanism • Capital account liberalization and management • Adequate mechanisms for crisis prevention and crisis response • Development finance beyond the crisis • Reform of global reserve system • Climate change and climate finance • Ensuring equity in a world of globalized finance

10. Governance and Institutional Reform • Global Steering Committee and challenge of inclusion and legitimacy • L20 vs. Global Economic Cooperation Council • G20 vs. IMFC/DC • Reform of the IFIs • FSB and Standard Setting Bodies • Regional Institutions and Financial Arrangements

11. Role and Governance of the IMF • “Candid, evenhanded and effective surveillance” • Enhanced and more automatic support to LICs in the face of shocks • Broad based precautionary financing to counter excessive self insurance and adequate financing to respond to systemic crises • Hence at least a doubling in IMF quota • A credible shift in voting power by January 2011 (but from whom to whom and on the basis of what criteria) • Open, competitive and merit based selection of senior management without nationality restrictions • Modification of decision rules (thresholds and double majority) • Composition and improved corporate governance of the Board • Greater Ministerial involvement and IMFC reform

12. Reinvigorating the Development Mandate of the World Bank • Promoting Knowledge Sharing and Institutional Development • Coping with Volatility and Protecting the Vulnerable • Scaling-up long-term development finance and countering the uphill flow of capital • Meeting the challenge of global public goods

13. Terms of Trade Volatility and Shock Frequency, 1975-2005 Source: CGD Brief, “ The Age of Turbulence and Poor Countries”, October 2008

14. Procyclicality of Capital Flows, 1990-2007 Source: International Monetary Fund, World Economic Outlook Database, April 2009

15. MDB Role in Responding to Financial Crises While the IMF is the focal point for the response to the systemic liquidity threat, the MDBs can play a critical complementary role in curtailing the spread and impact of the crisis: • Financing for counter-cyclical fiscal measures targeted towards maintenance of jobs and protection of the poor • Closing gaps and mitigating rollover risks in project financing including infrastructure, directly and by crowding in private and other official financing • Catalyzing trade financing • Supporting financial systems and credit flows to private sector and SMEs The MDBs have almost doubled their support through their non-concessional windows on these various fronts in response to the crisis, yet global aggregate analysis and case-by-case evidence suggests that the increase is far short of what is needed

16. A Better Balance Between Public and Private Sources of Development Financing Even after the crisis has abated, the global financial environment is likely to be much more difficult than the past eight years The wave of financial crises and cycles in private market flows have highlighted the high costs of borrowing from private markets for development financing (for countries that relied on market financing, typical costs of 20-50 percent of GDP since 1995) MDBs can play a critical role in mobilizing long-term market financing through its direct borrowing and by catalyzing stable private sector financing, and reducing risks arising from potential shocks MDBs remain the most effective channel to provide concessional financing for low income countries, and the combination of market financing and concessional arms provide a powerful means for augmenting and leveraging financing for maximum development impact across the range of EMEs and LICs MDBs have not been able to play this role because of a lack of a collective vision and will, lack of agreement on key operational policies and safeguards, and a governance structure that is skewed against those that have the greatest stake in the institutions.

17. The Uphill Flow of Capital, 1998-2008(US$ billions) Source: International Monetary Fund, World Economic Outlook Database, April 2009

18. EMBI Spreads (bps) Emerging market bond spread (EMBIG) Source: JPMorgan

19. Net Private Capital Flows (excl. FDI) and Net Multilateral Lending, 1990-2007(Billions, US$)

20. Multilateral Net Flows- Non-Concessional Lending (2002-2007)(Billions, US$)

21. Climate Change and the Global Goods Agenda • The role of the World Bank and the other MDBs on the climate change and the global public goods agenda needs to be based on a broader review of the institutional architecture and assignment of responsibilities for the global development challenges of this era. • Of greatest urgency is an effective institutional mechanism for responding to the looming challenge of climate change that entail extreme global risks with disproportionate effects on developing countries. • The UNFCC should be the primary framework for global negotiation and accountability.

22. Climate Change and the Global Goods Agenda • The World Bank and the RDBs, given their development mandate and comparative advantage in financing and country-based engagement, could play a critical role in implementing a global compact. • In particular, the World Bank and the RDBs could be a major source of external financing given their ability to mobilize market financing and crowd-in private sector financing to produce solutions on scale.

23. Three Implications for World Bank Reform • A major expansion in the World Bank role is warranted, which in turn will require a major boost to its capital. • The Bank’s business model needs to be reformed to reduce costs and enhance country ownership (EIB Model) • The World Bank will only be able to fulfill this potential role with a fundamental reform in its governance structure

24. Reform of Voice and Governance in the World Bank Initial package of reforms adopted at the last Annual Meetings (doubling of basic votes, partial offset for largest EMEs, and third chair for sub-Saharan Africa) was more modest than the IMF 2006-2008 package with respect to voice and vote reform Discussions are now underway on a second phase of reform for implementation by the 2010 Spring Meetings but with goals that are less ambitious than the IMF (3 percent rather than 5 percent) Need to encompass and distinguish between IBRD, IDA and IFC

25. Total Votes for Developed and Developing Countries in Shares

26. Shares of Developed and Developing Countries in Total Votes

27. Summary of G24 Positions Goals need to be more ambitious and criteria for reform different from the IMF Parity in voting shares should be a minimum goal Reform needs to be based on the Bank’s development mandate and address the democratic deficit in the governance structure Evolution in relative weights in the world economy based on GDP PPP Reflect Bank’s development mission and primary focus on developing countries Doubling of basic votes insufficient 26

28. Summary of Counter Positions No basis for parity IMF Quota Formula (actual or calculated) should drive adjustments Hence only small shift in voting power warranted Piece meal approach to a Bank specific approach No basis for non-dilution of DTCs 27

29. Distinct Mission and Functions of the World Bank IMF World Bank Mission International Poverty reduction and Financial Stability development Functions Multilateral and Global public goods related bilateral surveillance to development Lending Market-based lending Technical Assistance Concessional financing Policy advice and capacity building

30. New IMF Quota Formula CQS = (0.5*Y + 0.3*O + 0.15*V + 0.05*R) ↑k Y = 0.4 MP GDP + 0.6 PPP GDP over a three year period O = annual average of current receipts and current payments over five year period V = variability of current receipts and net capital flows measured as a standard deviation from the centered three-year trend over a thirteen year period R = twelve month average over a year of official reserves k = a compression factor of 0.95

31. IBRD shares / IMF Calculated Quotas ( number of countries) 30

32. Criteria for a World Bank Specific Approach Equity in representation based on the development and poverty mandate of the World Bank Recognition of the development cooperative nature of the institution, i.e. taking into account the role of those that enable the Bank to carry out its mission as well as those that are important as clients in achieving the Bank's objectives

33. Three Caveats on Current Discussions Economic weight is important but not the sole factor in determining representativeness or contribution/importance to the Bank’s development mission Similarly IDA contributions are important but not the principal factor in enabling the Bank to carry out its mission Role of clients and especially the poorest countries need to be more explicitly recognized in voting power

34. Towards a World Bank Specific Formula • Representation Pillar • 1$ = 1 Vote (GDP PPP and/or GDP MP) • 1 Country = 1 Vote (Basic Votes) • 1 Person = 1 Vote (Population or Square Root of Population) • Development Cooperative Pillar • Contributions • IDA • ODA • Outstanding IBRD Loans • Importance as Clients • Incidence of Poverty • Income status weighted by population

35. Comparison Between Developed and Developing Countries for Variables Used in World Bank Formula

36. Existing IBRD Voting Shares Compared with Illustrative Simulation Using World Bank Specific Criteria

37. Simulated Base Case / Total Votes(number of countries) 36

38. Reform of Voice and Governance in the World Bank In addition to voting reform, agreement to change the selection process for the Head and top management of the institution to an open merit-based process without regard to nationality, beginning with the next appointments, represents an early win in reform of voice and governance. Reform of composition of the Board and a review of decision rules should be pursued in the medium-term. A fundamental re-examination of the role of the Board and the Development Committee should be contingent on substantial progress on voice and vote reform.