What’s missing in response What’s missing in response to the global financial crisis?to the global financial crisis?Developing Country PerspectivesDeveloping Country Perspectives

Amar BhattacharyaAmar BhattacharyaG24 SecretariatG24 Secretariat

October 20th, 2009October 20th, 2009

Response to the Global Response to the Global Financial CrisisFinancial Crisis

What has been done?What has been done? What remains to be done?What remains to be done? What is missing on the agenda?What is missing on the agenda?

Response to the Global Response to the Global Financial CrisisFinancial Crisis

Policy ActionsPolicy Actions Institutional and Governance Institutional and Governance

ArrangementsArrangements

Response to the Global Response to the Global Financial CrisisFinancial Crisis

Main Areas of Policy ActionMain Areas of Policy Action Curbing the spread and impact Curbing the spread and impact

of the crisisof the crisis From crisis to sustained From crisis to sustained

recoveryrecovery Regulation of financial marketsRegulation of financial markets

Response to the Global Response to the Global Financial CrisisFinancial Crisis

Curbing the spread and impact of Curbing the spread and impact of the crisisthe crisis

Unprecedented stimulus and heterodox Unprecedented stimulus and heterodox measures resulting in “the largest and most measures resulting in “the largest and most coordinated fiscal stimulus ever undertaken”coordinated fiscal stimulus ever undertaken”

Varied responses to financial distressVaried responses to financial distress Macroeconomic and heterodox measures in Macroeconomic and heterodox measures in

larger EMEslarger EMEs Stepped up support from IFIs to developing Stepped up support from IFIs to developing

countries—but asymmetric in scale and scopecountries—but asymmetric in scale and scope

From Crisis to RecoveryFrom Crisis to Recovery

““Recovery and repair remains Recovery and repair remains incomplete”incomplete”

Concern about high unemployment and a Concern about high unemployment and a jobless recoveryjobless recovery

Sluggish private demand and downside Sluggish private demand and downside risksrisks

Tradeoffs on exit strategiesTradeoffs on exit strategies Compact on framework for strong, Compact on framework for strong,

sustainable and balanced growth with a sustainable and balanced growth with a process of mutual assessmentprocess of mutual assessment

Regulation of Financial Regulation of Financial MarketsMarkets

New and higher standards for prudential New and higher standards for prudential regulation (more and better quality of capital, regulation (more and better quality of capital, countercyclical buffers, minimum quantitative countercyclical buffers, minimum quantitative standards for liquidity, adoption of leverage standards for liquidity, adoption of leverage ratios, reform and harmonization of accounting ratios, reform and harmonization of accounting standards, reform of credit rating agencies)standards, reform of credit rating agencies)

Corporate Governance and Regulation Corporate Governance and Regulation (adoption of FSB guidelines on compensation, (adoption of FSB guidelines on compensation, Basel principles for corporate governance of Basel principles for corporate governance of financial institutions, revision of OECD financial institutions, revision of OECD corporate governance principles)corporate governance principles)

Regulation of Financial Regulation of Financial MarketsMarkets

Perimeters of regulation (all systemically Perimeters of regulation (all systemically significant financial institutions to be brought significant financial institutions to be brought under the regulatory net, tighter prudential under the regulatory net, tighter prudential regulations and bank resolution plans for too-regulations and bank resolution plans for too-big-to-fail institutions, strengthening the big-to-fail institutions, strengthening the robustness of the OTC derivatives market robustness of the OTC derivatives market including through capital requirements and including through capital requirements and standards for central counterparties)standards for central counterparties)

More coherent and effective national and cross-More coherent and effective national and cross-border supervision and crisis managementborder supervision and crisis management

Peer review process Peer review process

Missing or Less Addressed Missing or Less Addressed ElementsElements

Legacy of debt and lack of debt restructuring Legacy of debt and lack of debt restructuring mechanismmechanism

Capital account liberalization and Capital account liberalization and managementmanagement

Adequate mechanisms for crisis prevention Adequate mechanisms for crisis prevention and crisis responseand crisis response

Development finance beyond the crisisDevelopment finance beyond the crisis Reform of global reserve systemReform of global reserve system Climate change and climate financeClimate change and climate finance Ensuring equity in a world of globalized Ensuring equity in a world of globalized

financefinance

Governance and Governance and Institutional ReformInstitutional Reform

Global Steering Committee and Global Steering Committee and challenge of inclusion and legitimacychallenge of inclusion and legitimacy L20 vs. Global Economic Cooperation L20 vs. Global Economic Cooperation

CouncilCouncil G20 vs. IMFC/DCG20 vs. IMFC/DC

Reform of the IFIsReform of the IFIs FSB and Standard Setting BodiesFSB and Standard Setting Bodies Regional Institutions and Financial Regional Institutions and Financial

ArrangementsArrangements

Role and Governance of the Role and Governance of the IMFIMF

““Candid, evenhanded and effective surveillance”Candid, evenhanded and effective surveillance” Enhanced and more automatic support to LICs in the face of Enhanced and more automatic support to LICs in the face of

shocksshocks Broad based precautionary financing to counter excessive self Broad based precautionary financing to counter excessive self

insurance and adequate financing to respond to systemic crisesinsurance and adequate financing to respond to systemic crises Hence at least a doubling in IMF quotaHence at least a doubling in IMF quota A credible shift in voting power by January 2011 (but from whom A credible shift in voting power by January 2011 (but from whom

to whom and on the basis of what criteria)to whom and on the basis of what criteria) Open, competitive and merit based selection of senior Open, competitive and merit based selection of senior

management without nationality restrictionsmanagement without nationality restrictions Modification of decision rules (thresholds and double majority)Modification of decision rules (thresholds and double majority) Composition and improved corporate governance of the BoardComposition and improved corporate governance of the Board Greater Ministerial involvement and IMFC reformGreater Ministerial involvement and IMFC reform

Reinvigorating the Reinvigorating the Development Mandate of Development Mandate of

the World Bankthe World Bank Promoting Knowledge Sharing and Promoting Knowledge Sharing and

Institutional DevelopmentInstitutional Development Coping with Volatility and Protecting Coping with Volatility and Protecting

the Vulnerablethe Vulnerable Scaling-up long-term development Scaling-up long-term development

finance and countering the uphill finance and countering the uphill flow of capitalflow of capital

Meeting the challenge of global Meeting the challenge of global public goodspublic goods

13

Terms of Trade Volatility and Shock Terms of Trade Volatility and Shock Frequency, 1975-2005Frequency, 1975-2005

Volatility

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Non-Insdutrial Industrial

Volatility per Income Level

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Low Income Middle Income High Income

Shock Frequency

0

2

4

6

8

10

12

14

16

Non-Industrial Industrial

Per

cen

t

Shock Frequency per Income Level

0

5

10

15

20

25

Low Income Middle Income High Income

Per

cen

t

SourceSource: CGD Brief, “ The Age of Turbulence and Poor Countries”, October : CGD Brief, “ The Age of Turbulence and Poor Countries”, October 20082008

14

Procyclicality of Capital Procyclicality of Capital Flows, 1990-2007Flows, 1990-2007

-50

50

150

250

350

450

550

650

750

US

$ B

illio

ns

0

2

4

6

8

10

12

14

16

18

20

Per

cen

t (%

)

Net Private Capital Flows (less FDI) Growth of Developing Countries

Net Private Capital Flows GDP, Growth

2008 Financial Crisis

Asian/DotCom Crisis

SourceSource: International Monetary Fund, World Economic Outlook Database, April 2009: International Monetary Fund, World Economic Outlook Database, April 2009

MDB Role in Responding to MDB Role in Responding to Financial CrisesFinancial Crises

While the IMF is the focal point for the response to the systemic While the IMF is the focal point for the response to the systemic liquidity threat, the MDBs can play a critical complementary role in liquidity threat, the MDBs can play a critical complementary role in curtailing the spread and impact of the crisis:curtailing the spread and impact of the crisis:

Financing for counter-cyclical fiscal measures targeted towards Financing for counter-cyclical fiscal measures targeted towards maintenance of jobs and protection of the poormaintenance of jobs and protection of the poor

Closing gaps and mitigating rollover risks in project financing Closing gaps and mitigating rollover risks in project financing including infrastructure, directly and by crowding in private and including infrastructure, directly and by crowding in private and other official financingother official financing

Catalyzing trade financingCatalyzing trade financing Supporting financial systems and credit flows to private sector and Supporting financial systems and credit flows to private sector and

SMEsSMEs

The MDBs have almost doubled their support through their non-The MDBs have almost doubled their support through their non-concessional windows on these various fronts in response to the concessional windows on these various fronts in response to the crisis, yet global aggregate analysis and case-by-case evidence crisis, yet global aggregate analysis and case-by-case evidence suggests that the increase is far short of what is neededsuggests that the increase is far short of what is needed

A Better Balance Between Public A Better Balance Between Public and Private Sources of and Private Sources of

Development Financing Development Financing Even after the crisis has abated, the global financial environment is likely Even after the crisis has abated, the global financial environment is likely

to be much more difficult than the past eight yearsto be much more difficult than the past eight years The wave of financial crises and cycles in private market flows have The wave of financial crises and cycles in private market flows have

highlighted the high costs of borrowing from private markets for highlighted the high costs of borrowing from private markets for development financing (for countries that relied on market financing, development financing (for countries that relied on market financing, typical costs of 20-50 percent of GDP since 1995)typical costs of 20-50 percent of GDP since 1995)

MDBs can play a critical role in mobilizing long-term market financing MDBs can play a critical role in mobilizing long-term market financing through its direct borrowing and by catalyzing stable private sector through its direct borrowing and by catalyzing stable private sector financing, and reducing risks arising from potential shocksfinancing, and reducing risks arising from potential shocks

MDBs remain the most effective channel to provide concessional financing MDBs remain the most effective channel to provide concessional financing for low income countries, and the combination of market financing and for low income countries, and the combination of market financing and concessional arms provide a powerful means for augmenting and concessional arms provide a powerful means for augmenting and leveraging financing for maximum development impact across the range of leveraging financing for maximum development impact across the range of EMEs and LICsEMEs and LICs

MDBs have not been able to play this role because of a lack of a collective 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 vision and will, lack of agreement on key operational policies and safeguards, and a governance structure that is skewed against those that safeguards, and a governance structure that is skewed against those that have the greatest stake in the institutions. have the greatest stake in the institutions.

17

The Uphill Flow of Capital, The Uphill Flow of Capital, 1998-20081998-2008

(US$ billions)(US$ billions)

-1500

-1000

-500

0

500

1000

1500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Net Private Capital (NPC) NPC Less Unrecorded Capital OutflowsReserves Total Capital Outflows

SourceSource: International Monetary Fund, World Economic Outlook Database, April 2009: International Monetary Fund, World Economic Outlook Database, April 2009

18

EMBI Spreads (bps)EMBI Spreads (bps)

Source: JPMorgan

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

1994M1 1996M4 1998M7 2000M10 2003M1 2005M4 2007M7

Bo

nd

Sp

rea

ds

(b

as

is p

oin

ts)

2009M8

Emerging market bond spread (EMBIG)

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

(Billions, US$)

-100

0

100

200

300

400

500

600

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-10

0

10

20

30

40

50

60

Net Private Capital Flows (excl. FDI) Net Multilateral Non-Concessional Net Multilateral Concessional

Net private Capital Flows(Left axis)

Net Multilateral Concessional(Right axis)

Net Multilateral Non-Concessional (Right axis)

20

Multilateral Net Flows- Non-Multilateral Net Flows- Non-Concessional Lending (2002-2007)Concessional Lending (2002-2007)

(Billions, US$)(Billions, US$)

-10

-8

-6

-4

-2

0

2

4

6

2002 2003 2004 2005 2006 2007

AFRICAN DEV. BANK ASIAN DEV. BANK IBRD

IDB Other MultiNational Total

Climate Change and the Global Climate Change and the Global Goods AgendaGoods Agenda

The role of the World Bank and the other MDBs on The role of the World Bank and the other MDBs on the climate change and the global public goods the climate change and the global public goods agenda needs to be based on a broader review of agenda needs to be based on a broader review of the institutional architecture and assignment of the institutional architecture and assignment of responsibilities for the global development responsibilities for the global development challenges of this era.challenges of this era.

Of greatest urgency is an effective institutional Of greatest urgency is an effective institutional mechanism for responding to the looming challenge mechanism for responding to the looming challenge of climate change that entail extreme global risks of climate change that entail extreme global risks with disproportionate effects on developing with disproportionate effects on developing countries.countries.

The UNFCC should be the primary framework for The UNFCC should be the primary framework for global negotiation and accountability.global negotiation and accountability.

Climate Change and the Global Climate Change and the Global Goods AgendaGoods Agenda

The World Bank and the RDBs, given their The World Bank and the RDBs, given their development mandate and comparative development mandate and comparative advantage in financing and country-based advantage in financing and country-based engagement, could play a critical role in engagement, could play a critical role in implementing a global compact.implementing a global compact.

In particular, the World Bank and the RDBs In particular, the World Bank and the RDBs could be a major source of external financing could be a major source of external financing given their ability to mobilize market given their ability to mobilize market financing and crowd-in private sector financing and crowd-in private sector financing to produce solutions on scale.financing to produce solutions on scale.

23

Three Implications for Three Implications for World Bank ReformWorld Bank Reform

A major expansion in the World Bank A major expansion in the World Bank role is warranted, which in turn will role is warranted, which in turn will require a major boost to its capital.require a major boost to its capital.

The Bank’s business model needs to be The Bank’s business model needs to be reformed to reduce costs and enhance reformed to reduce costs and enhance country ownership (EIB Model)country ownership (EIB Model)

The World Bank will only be able to The World Bank will only be able to fulfill this potential role with a fulfill this potential role with a fundamental reform in its governance fundamental reform in its governance structurestructure

Reform of Voice and Governance Reform of Voice and Governance in the World Bank in the World Bank

Initial package of reforms adopted at the last Annual Initial package of reforms adopted at the last Annual Meetings (doubling of basic votes, partial offset for Meetings (doubling of basic votes, partial offset for largest EMEs, and third chair for sub-Saharan largest EMEs, and third chair for sub-Saharan Africa) was more modest than the IMF 2006-2008 Africa) was more modest than the IMF 2006-2008 package with respect to voice and vote reformpackage with respect to voice and vote reform

Discussions are now underway on a second phase of Discussions are now underway on a second phase of reform for implementation by the 2010 Spring reform for implementation by the 2010 Spring Meetings but with goals that are less ambitious than Meetings but with goals that are less ambitious than the IMF (3 percent rather than 5 percent)the IMF (3 percent rather than 5 percent)

Need to encompass and distinguish between IBRD, Need to encompass and distinguish between IBRD, IDA and IFCIDA and IFC

25

Total Votes for Developed Total Votes for Developed and Developing Countries and Developing Countries

in Sharesin Shares

0

10

20

30

40

50

60

70

IMF IBRD AsDB IADB

Developed Countries Developing Countries

26

Shares of Developed and Shares of Developed and Developing Countries in Developing Countries in

Total VotesTotal Votes

0

10

20

30

40

50

60

70

IBRD IDA MIGA IFC

Developed Countries Developing Countries

27

Summary of G24 PositionsSummary of G24 Positions

Goals need to be more ambitious and criteria Goals need to be more ambitious and criteria for reform different from the IMFfor reform different from the IMF

Parity in voting shares should be a minimum Parity in voting shares should be a minimum goalgoal

Reform needs to be based on the Bank’s Reform needs to be based on the Bank’s development mandate and address the development mandate and address the democratic deficit in the governance structuredemocratic deficit in the governance structure Evolution in relative weights in the world economy Evolution in relative weights in the world economy

based on GDP PPPbased on GDP PPP Reflect Bank’s development mission and primary Reflect Bank’s development mission and primary

focus on developing countriesfocus on developing countries Doubling of basic votes insufficientDoubling of basic votes insufficient

28

Summary of Counter PositionsSummary of Counter Positions

No basis for parityNo basis for parity IMF Quota Formula (actual or IMF Quota Formula (actual or

calculated) should drive adjustmentscalculated) should drive adjustments Hence only small shift in voting Hence only small shift in voting

power warrantedpower warranted Piece meal approach to a Bank Piece meal approach to a Bank

specific approachspecific approach No basis for non-dilution of DTCsNo basis for non-dilution of DTCs

29

Distinct Mission and Distinct Mission and Functions of the World Functions of the World

BankBankIMFIMF World BankWorld Bank

MissionMission International International Poverty reduction andPoverty reduction and

Financial StabilityFinancial Stability developmentdevelopment

FunctionsFunctions Multilateral andMultilateral and Global public goods relatedGlobal public goods related

bilateral surveillancebilateral surveillance to developmentto development

LendingLending Market-based lendingMarket-based lending

Technical AssistanceTechnical Assistance Concessional Concessional financingfinancing

Policy advice and capacityPolicy advice and capacity

buildingbuilding

30

New IMF Quota FormulaNew IMF Quota Formula

CQS = (0.5*Y + 0.3*O + 0.15*V + 0.05*R) CQS = (0.5*Y + 0.3*O + 0.15*V + 0.05*R) ↑k↑k

Y = 0.4 MP GDP + 0.6 PPP GDP over a three Y = 0.4 MP GDP + 0.6 PPP GDP over a three year periodyear period

O = annual average of current receipts and O = annual average of current receipts and current payments over five year periodcurrent payments over five year period

V = variability of current receipts and net V = variability of current receipts and net capital flows measured as a standard capital flows measured as a standard deviation from the centered three-year deviation from the centered three-year trend over a thirteen year periodtrend over a thirteen year period

R = twelve month average over a year of R = twelve month average over a year of official reservesofficial reserves

k = a compression factor of 0.95k = a compression factor of 0.95

3131

IBRD shares / IMF Calculated Quotas ( number of countries)

IBRD shares / IMF Calculated New Quota Formula ( # of countries)

Overrepresented   Aligned   Underrepresented

Highly Moderately   Broadly   Moderately Highly

x>1.50 1.10<x<1.50 0.9<x<1.1 0.5<x<0.9 x<0.5

Advanced Economies 3 6 6 8 3

US 0 0 0 1 0

Japan 0 0 1 0 0

EU-15 0 2 5 5 3

Other Advanced 3 4 0 2 0

         

Developing and Transition Countries 99 20 9 18 13

Asia 18 1 2 3 7

MENA 7 3 0 6 3

SSA 40 5 0 2 0

LAC 19 8 1 1 3

ECA 15 3 6 6 0

         

Total 102 26 15 26 16

Criteria for a World Bank Specific Criteria for a World Bank Specific ApproachApproach

Equity in representation based on the Equity in representation based on the development and poverty mandate of the development and poverty mandate of the World BankWorld Bank

Recognition of the development cooperative Recognition of the development cooperative nature of the institution, i.e. taking into nature of the institution, i.e. taking into account the role of those that enable the account the role of those that enable the Bank to carry out its mission as well as Bank to carry out its mission as well as those that are important as clients in those that are important as clients in achieving the Bank's objectivesachieving the Bank's objectives

Three Caveats on Current Three Caveats on Current DiscussionsDiscussions

Economic weight is important but not the sole Economic weight is important but not the sole factor in determining representativeness or factor in determining representativeness or contribution/importance to the Bank’s contribution/importance to the Bank’s development missiondevelopment mission

Similarly IDA contributions are important but Similarly IDA contributions are important but not the principal factor in enabling the Bank to not the principal factor in enabling the Bank to carry out its missioncarry out its mission

Role of clients and especially the poorest Role of clients and especially the poorest countries need to be more explicitly recognized countries need to be more explicitly recognized in voting powerin voting power

34

Towards a World Bank Towards a World Bank Specific FormulaSpecific Formula

I.I. Representation PillarRepresentation Pillar1.1. 1$ = 1 Vote (GDP PPP and/or GDP MP)1$ = 1 Vote (GDP PPP and/or GDP MP)2.2. 1 Country = 1 Vote (Basic Votes)1 Country = 1 Vote (Basic Votes)3.3. 1 Person = 1 Vote (Population or Square Root of 1 Person = 1 Vote (Population or Square Root of

Population)Population)

II.II. Development Cooperative PillarDevelopment Cooperative Pillar1.1. ContributionsContributions

1.1. IDAIDA2.2. ODAODA3.3. Outstanding IBRD LoansOutstanding IBRD Loans

2.2. Importance as ClientsImportance as Clients1.1. Incidence of PovertyIncidence of Poverty2.2. Income status weighted by populationIncome status weighted by population

35

Comparison Between Developed and Developing Countries for Variables Used in

World Bank Formula

0

20

40

60

80

100

120

Developed DTC Countries

36

Existing IBRD Voting Shares Compared with Illustrative Simulation Using World

Bank Specific Criteria

0

10

20

30

40

50

60

70

IBRD% of Total Votes IBRD Base Case Simulation

Advanced Economies Developing and Transition Countries

3737

Simulated Base Case / Total Votes

(number of countries)

  x>1.5 1.10<x<1.50 .9<x<1.1 .5<x<.9 x<.5

Advanced Economies 1 0 1 20 4

US 0 0 0 1 0

Japan 0 0 0 1 0

EU-15 1 0 1 11 2

Other Advanced 0 0 0 7 2

           

Developing and Transition Countries 83 32 19 19 6

Asia 17 9 4 0 1

MENA 8 2 2 4 3

SSA 36 6 3 2 0

LAC 13 6 7 4 2

ECA 9 9 3 9 0

           

Total 84 32 20 39 10

Reform of Voice and Governance Reform of Voice and Governance in the World Bank in the World Bank

In addition to voting reform, agreement to change the In addition to voting reform, agreement to change the selection process for the Head and top management of selection process for the Head and top management of the institution to an open merit-based process without the institution to an open merit-based process without regard to nationality, regard to nationality, beginning with the next beginning with the next appointmentsappointments, represents an early win in reform of , represents an early win in reform of voice and governance.voice and governance.

Reform of composition of the Board and a review of Reform of composition of the Board and a review of decision rules should be pursued in the medium-term.decision rules should be pursued in the medium-term.

A fundamental re-examination of the role of the Board A fundamental re-examination of the role of the Board and the Development Committee should be contingent and the Development Committee should be contingent on substantial progress on voice and vote reform.on substantial progress on voice and vote reform.