Building a sustainable economy is a critical concern not just for policy makers, but also for businesses, and for all citizens. It is an imperative if we are to protect the development gains we’ve made in recent decades to lift millions out of extreme poverty. To achieve a sustainable economy, we need to improve public services, unleash private sector creativity and vitality, as well as create global public goods to make the world more secure and prosperous.
Daunting global challenges impede this path. These challenges do not respect borders, and require international cooperation at many levels. Climate change, pandemics, and violence are shared problems which spill across national boundaries. Within countries, and between countries, the challenges also include the risks of inequality and polarization of our political and social institutions. It includes the lightning-fast changes in technology which will disrupt markets and beyond.
There is a substantial gap in the access to investments in human capital -- like education, training, and health care -- and these are creating additional strains on our political institutions. In many parts of the world, violence has led to mass displacement, loss of life, and destruction of infrastructure, and staggering economic losses. In the largest humanitarian crisis since the second world war, about 65 million people have been forcibly displaced from their homes. About 21 million of these are refugees, and half of those refugees are under the age of 18. Income gaps and inequality, demographic imbalances, and climate change will continue to drive this migration in the coming years.
To be clear, development achievements don’t guarantee peace and stability -- but development failures often lead to extremism, violence, and even war. We see the early warning signs when public and private institutions lose their broad legitimacy. And we see the warning signs when citizens see themselves excluded from economic gains.
If these challenges weren’t enough, today there are 20 million people -- including 1.4 million children -- who are at the “tipping point” of famine. Nigeria, South Sudan, Somalia, and Yemen are all at risk, and just this past week famine was officially declared in South Sudan. There has been a perfect storm of root causes for these famine risks, including conflict, civil insecurity, poor governance, large-scale displacement, climate change, and drought. There is also a credible risk of famines in Ethiopia, Kenya, and Sudan, with drought conditions extending also to Uganda and Tanzania. This challenge also easily crosses borders. For example, food insecurity in Somalia and famine in South Sudan are accelerating the flow of refugees into Ethiopia. The UN is already calling this the worst humanitarian crisis since 1945. It is clear that short-term life-saving support has to be accompanied by longer term development responses that assist countries to develop better coping mechanisms.
The United Nations has announced a $4.4 billion-dollar appeal to address food security, health, water, sanitation and nutrition needs in Nigeria, South Sudan, Somalia and Yemen. The World Bank Group is assembling a financial package of more than $1.6 billion dollars to build social protection systems, strengthen community resilience, and maintain service delivery for the most vulnerable. This includes existing operations of over $870 million dollars that will help communities threatened by famine. Famine will have lasting impacts on people’s on health, as well as their ability to learn and work, so our goal is to build resilience to future shocks. The World Bank Group is coordinating closely with the UN and other partners in all areas of our response, so that humanitarian and development actors are working together to address the full spectrum of challenges, including addressing the root causes of the crisis.
Whether it is famine, climate change, conflict, pandemics, successfully addressing these types of challenges requires working in partnership within and between countries, with international organizations, and with the private sector and civil society. The World Bank Group is engaging with countries to protect the poor and vulnerable, and to ensure inclusive and accountable service delivery, with a stronger private sector that can create jobs and opportunities.
Official development assistance funds, even when combined with government resources, will never be enough to meet these challenges. Going forward, the core focus will have to be on leveraging and mobilizing global funds -- especially from the private sector -- through innovative mechanisms to meet the extraordinary financing needs of the region.
In the past we tried to address these challenges though the framework of the Millennium Development goals, but as you can see progress was mixed.
In 2015, the global community came together to frame the Sustainable Development Goals (or SDGs), which are comprehensive, and apply to all countries, not just developing nations.
The SDGs are interconnected and interdependent. The SDG acknowledge that we can’t look at poverty, health, and education as stand-alone achievements. Now global partners will emphasize how stronger health systems, skills building, within a framework of strong institutions and good governance, can lead to better systems of consumption and production, and can help promote stability and peace, and end poverty.
The World Bank Group has made substantial financial and organizational pledges to help address these challenges and achieve the SDGs. We reorganized our structure to create “global practices” which largely coincide with the thematic structure of the 17 SDGs.
In addition, the World Bank Group is collaborating with the other multilateral development banks, the private sector, governments, the UN, and others to increase our joint impact. Our institution provides concessional financing, guarantees, and matches its investments with private sector capital while helping countries create an enabling environment to attract private investment.
The World Bank Group has three priorities in our efforts to reach our twin goals of ending poverty and boosting shared prosperity, which are fully aligned with the Sustainable Development Goals. Each of these priorities require financing and private sector participation: First, we need to accelerate inclusive and sustainable economic growth. This obviously requires adequate private sector finance, especially in infrastructure. Second, we need to invest in human capital, which requires funding and private sector innovation and management to create efficiencies. And third, we need to foster resilience to global shocks and threats, from pandemics to climate change.
Each of these will require adequate financial support, and robust participation from the private sector. It will require good data, and savvy delivery to implement these ambitious plans. I’d like to say a few word about each of these.
On finance, as I said earlier, Official Development Assistance (or ODA), which is about $132 billion per year, will never be enough. To put this in context, that’s about as much as Chinese workers send annually to their families in remittances. It’s a third of what Germany spends every year on its health care. In contrast, the UN’s trade arm, UNCTAD, says that the annual investment gap to reach the SDGs is $2.5 trillion. In other words, $132 billion to achieve the SDGs in developing countries is not enough, and it never will be.
The World Bank Group is doing its part, through a variety of mechanisms, to leverage and mobilizing global funds – especially from the private sector -- through innovative mechanisms to meet the extraordinary financing needs for the SDGs. Certainly the World Bank Group has provided concessional financing mechanisms to countries, but it is also using guarantees, and matching its investments with private sector capital and helping countries create an enabling environment to attract private investment.
The International Development Association (IDA), the World Bank Group fund devoted to the poorest countries, which just completed its 18th replenishment this past December, has mobilized a record $75 billion commitment from donors, with a focus on fragility and climate. In addition, for the first time in its 56-year history, IDA will leverage its equity by blending donor contributions with internal resources and funds raised through debt markets.
To better sequence our interventions, we’ve developed a “cascade approach” to investment decision-making to encourage private sector participation, while leveraging and preserving scarce public dollars for critical public investments. If commercial financing is available, that is the preferred course. If it is absent, we try to address market failures. If those efforts are unsuccessful, we use utilize risk instruments and our own matching capital to try to encourage private investment. Finally, if absolutely necessary, then public and concessional financing will be used.
It is important to note that countries’ own domestic resources are the largest source of funds available for countries to finance their development. While many OECD countries have tax-to-GDP ratios of 40-60 percent there are many developing countries with tax-to-GDP ratios of less than 15 percent. The World Bank Group supports improved domestic resource mobilization, including technical assistance and policy advice, such as a new joint tax initiative with the IMF. Countries would do well to assist sub-national units of government to build their capacity as well, since governments which are closest to their people are the most responsive to their needs. In addition, the World Bank Group is working with partners to stem the flow of billions of dollars in illicit funds which are depriving countries of the revenue they need to grow and develop.
At the individual level, the World Bank Group and its partners are making progress on financial inclusion. From 2011 and 2014, according to the World Bank Group Findex report, 700 million people became account holders at banks, other financial institutions, or mobile money service providers, and the number of “unbanked” individuals dropped 20 percent to 2 billion adults. Still, that means that now only 62 percent of adults have access to an account. For the poorest households, less than half had accounts, though since these are 2014 numbers I assume that number will have changed. Because of technological changes, I’m optimistic that they’ve improved somewhat.
All of you here are more acquainted with IT and gadgets, and I appreciate the opportunities to broaden access through technology. If it improves financial inclusion, then we still have to ask, “included into what?” Will the poor have better insurance? Improved leasing instruments to help farmers or manufacturers? Access to more affordable housing through mortgage finance? Or are the poor to be given access to greater debt and liability. The fintech world needs to demonstrate the benefits of these changes, because the risks of greater concentration of wealth are very high in this new, more mobile world. The evolution of the system is accelerating its pace, but the financial system is always changing, from paper checkbooks, to plastic credit cards, to ATMs, to mobile money, and now Blockchain. If the evolution of the financial system had always provided better access to the real economy for the poor, then much of our work in development would already be done. But it hasn’t, so it behooves us to be cautious. We need to seize opportunities that work for the SDGs and the 2030 Agenda, align the incentives appropriately, for things like consumer protection, financial literacy, and adequate regulatory frameworks for protection of all stakeholders.
The private sector is key to the entire 2030 Agenda and the SDGs, given their reach and depth. Ninety percent of the jobs created during the 15 years of the MDGs – which lifted over a billion people out of poverty – were created by the private sector. The private sector is a major force for good, and its innovative financing and knowledge -- in everything from energy, to supply chain management, to infrastructure, to health care delivery -- is badly needed. Private sector finance is an essential component of our ambition to lift the remaining 700 million people out of extreme poverty, and to put the world on a path to economically and environmentally sustainable growth
After the 2008-2009 financial crisis, there was a revival of sorts of several important financial approaches to funding development, including cooperatives and impact financing, which includes Islamic finance, as well as new green finance mechanisms.
Long before Lyft or Airbnb, cooperatives capitalized on a sharing economy, but with an explicit mission to share benefits with everyone in society, especially the poor and vulnerable. Cooperatives have a distinctive link with formal economy. They also have a unique inclusive governance and structure we can learn from, and they recently have begun to expand their reach through technology and innovation. Cooperative Financial Institutions are one of the main providers of financial services to low-income people, with 700 million members and accountholders worldwide. CFIs have large constituencies in India, China, Indonesia, Brazil, Mexico, Kenya, Morocco, and over 35 smaller developing countries such as Togo or Haiti.
Yet in a more mobile and urban world, cooperatives will need to adapt while maintaining their basic values and approach. As seen in Sub-Saharan Africa, mobile money accounts can drive financial inclusion. While just 1 percent of adults globally say they use a mobile money account and nothing else, in Sub-Saharan Africa, 12 percent of adults (64 million adults) have mobile money accounts; 45 percent of them have only a mobile money account. Mobile money accounts can help narrow the gap in financial inclusion between men and women, which could have important effects on inequality and child welfare. CFIs will have to stay abreast of these developments and exploit these new technologies to maximize financial inclusion, particularly for the poor.
Now let’s talk about climate change -- and the green finance being used to address it.
The World Bank Group is actively engaged with the private sector and the financial community, urging action on climate and carbon pricing that not only delivers on the Paris agreement commitments, but also provides tremendous business opportunities for our clients and country partners.
We are seeing increased interest in instruments that crowd in the private sector -- including the trillions of finance currently sitting on the sidelines -- to contribute to solving global challenges and help mitigate the impact of recurring disasters. There are hundreds of climate projects around the world, but they are not happening fast enough at the scale we need. The investment needs embedded in the countries’ existing climate change plans amount to more than $1 trillion dollars a year over the next 15 years. And just to close the energy gap sustainably, developing countries need to increase annual energy spending to $1.8 trillion dollars by 2035. In response to this need, the World Bank Group has pledged to increase climate-related financing from 21 percent of its portfolio to 28 percent by 2020, with the support of its members and in response to client demand.
Unlocking this finance will take coordinated action across countries, institutions and financial markets. We need to reduce the cost of capital for investors. Countries can help by putting in place good, stable policies and risk mitigation mechanisms. In addition, we need to draw in non-traditional sources of finance, such as sovereign wealth funds, and pension funds, which have trillions of dollars in liquidity looking for secure investment opportunities. Finally, we need to “green” the financial sector so that it is ready and able to finance the infrastructure of the future. At the same time, the emergence of green bonds as an asset class holds great promise. The green bonds market has since developed rapidly and, according to the UN Environment Programme (UNEP) has about $118 billion dollars outstanding. Johannesburg, South Africa, issued Africa’s first municipal green bond in 2014 – over $100 million dollars -- to help finance emissions-reducing projects including bio gas energy, solar power, and sustainable transportation.
Another growing area of innovative finance is Islamic Finance, which is a form of impact financing. Islamic finance has important advantages over conventional financial products. Its prohibition of interest and requirement that investments be linked to the real economy, and the profit-and-loss sharing arrangements add stability to the financial sector. Islamic finance would also enhance financial inclusion as it incorporates people who, for cultural or religious reasons, are excluded from the traditional financial system. This is perhaps one reason why Islamic finance has been expanding at 10-12 percent per year during the last decade or so.
The World Bank Treasury has issued a variety of Islamic Financial instruments, including two Sukuk (bonds that meet Islamic strictures on interest), which have raised $700 million. Similarly, the Bank’s private-sector arm, the International Financial Corporation (or IFC), has established the IFC Sukuk Company, which issued $100 million dollars in trust certificates in 2015. The Bank’s political risk insurance arm, the Multilateral Investment Guarantee Agency (or MIGA), has provided a $427 million-dollar Sharia-compliant investment guarantee for an infrastructure project in Djibouti and $450 million in political risk insurance for a telecommunications investment in Indonesia.
One example of private sector investment in the SDGs occurred earlier this year. The World Bank issued bonds that for the first time directly link returns to the performance of companies advancing global development priorities set out in the Sustainable Development Goals, including gender equality, health, and sustainable infrastructure. The equity-index linked bonds raised a total of 163 million Euros from institutional investors in France and Italy. The return on investment in the bonds is directly linked to the stock performance of companies included in the Solactive Sustainable Development Goals World Index. The World Bank will use the proceeds to support the financing of projects that advance its goals of eliminating extreme poverty and boosting shared prosperity, and that are aligned with the Sustainable Development Goals or SDGs.
Ultimately, these investments can have a very positive impact, but they alone are not enough. What we need to do is to make sure the finance sector is driven by clear incentives to do more and better. I’ve discussed some ways to do this, but it will take creativity from people here in this room, in the wider development community, and especially in the financial sector, to achieve this.
As I mentioned earlier, two more important elements for success of the SDGs are quality data and implementation, which I’ll just say a few words about given time constraints. Quality, reliable, accessible, and timely data is one of the most powerful tools for achieving the 2030 Agenda and ending extreme poverty. We need improved data both to monitor progress, diagnose problems, and help design policies and programs that will be needed to find solutions and make progress towards the SDGs. While the World Bank Group is already committed to household budget surveys, we also need to work to improve data production, accessibility, and analytics, particularly to support our implementation, as well as for tracking progress on the twin goals and SDGs. The Bank Group is aligning its corporate scorecard and Systemic Country Dialogue to the SDGs, while also working with the UN statistical commission, and the Global Partnership for Sustainable Development Data.
Finally, on implementation partners need to complement policy work with operational responses and financing -- engaging with both the public and private sectors. We have to advance global policies that are consistent across the global, regional, and national levels and across the public and private sectors, all of which are essential for inclusive growth and poverty reduction. Investments in infrastructure and human capital are important, but it also requires solid institutions of governance and improving client capacity. All partners must work to build durable global public goods, addressing the challenges I mentioned at the top, including forced displacement, climate change, pandemics, etc.
Before I close, I want to return to the issue of the financial sector, which is key to our agenda. I see that I am among some very bright minds here today. I’ll say that perhaps too many of our brightest minds have migrated to finance at the expense of other professions. We need the vitality and entrepreneurial spirit of the private sector finance sector to apply that same vigor to the world’s toughest challenges.
I’ll go a step further. Our global financial system is essential to the stability not just of our economies, but also of our political and social institutions. As Robert Shiller said in his book, Finance and the Good Society, our financial system “appears...to be broken.” He urges that it be “thoughtfully guided into the future, expanded, democratized and humanized…so that financial institutions will be even more pervasive and positive in their impact.” This will allow millions more people to enjoy the benefits of the financial system, sharing information and access to finance, while backing these systems up with effective social safety nets. This kind of system, he says, will redirect the anger about inequality towards peaceful change.
We will all have to work together – businesses, government, multilateral institutions, foundations, and NGOs -- to pursue this common vision of sustainable development. It will require us to build stable and efficient institutions, to invest in our people, and to pursue peace with as much passion as we do conflict – and then we can realize a world that is more prosperous, more secure, and more just.