MR. MALPASS: Well, Ilan, I'm very pleased to be here. I've got some notes, and then I've got some ideas of things to tell people about, and then looking forward to the conversation. I’m especially pleased to be here with the National Association for Business Economists. The NABE meetings were one of my favorites in the 1980s when I was at the Senate— when I worked at the Senate Budget Committee, Treasury, and Congress's Joint Economic Committee. So, it's fun to be back and see some old friends.
The 1980s was an important time for US growth, but like today, the years have presented stiff challenges for global growth, and especially for developing countries. There are quite a few hotter topics today, like Coronavirus, but the one I'd like to tackle is the need for faster growth in developing countries, the challenges that they're facing, and I want to focus on the importance of Europe's growth rate within the developing country growth rate matrix, but also the importance of digital financial services, which I want to speak a little about, and also transparency of debt and investment policies, which is something that the World Bank is working on [inaudible].
I can list the various parts—not everyone knows what the World Bank is—but the short take is there are five different parts of it: IBRD; IDA; the IFC, the International Finance Corporation, which works on private sector growth; there's MIGA, which insures against different types of cross-border risk; and there's also ICSID, which helps settle investment disputes between governments and investors. So, it's a big group with a very clear mission: the mission of lowering the poverty rate and also increasing shared prosperity. That shared prosperity can— it means to me, and can be done from a mathematical standpoint, higher median incomes, better living standards, better social circumstances within countries. So, it’s a goal that probably we all share: to have better prospects for people around the world and especially in the poorer countries.
The World Bank does forecasts, or we have forecasts sometimes. In January we put out a forecast for 2020 of 2.5% real growth for the world. The good news is that was slightly higher than what the growth rate was in 2019, but the bad news is, for one, the first half is probably going to be slower than that, given Coronavirus, but also, even at 2.5% real growth for the world, that simply is not enough growth to really lift developing countries. Many of the poorer countries need a faster growth rate by the world economy in order to lift them up.
There's also the concern that growth is unequal. Inequality takes various forms, which are all concerning for developing country growth. One is that capital is tending to go more towards developed countries than developing countries, meaning there's not an equalization of capital flows going on. Even within developing countries, capital is going more toward big companies, rather than small companies, and so that, too, contributes to the inequality of both, and also of wealth. And there is an added problem with inequality. As we look at the investment rates for developing countries, they've been sluggish. Our report, the World Bank report in June of 2019, had a subtitle, which is: Sluggish Investment in Developing Countries. So if you start from a platform that's unequal, and then you have an inequality of new investment that, that gives you prospects for continued inequality or slow growth in the developing world—that there's simply not enough new investment taking place.
I'd like to focus for a little bit on Europe, and then talk also about transparency and digital financial services. As we look at the growth rate around the world, one of the notable weaknesses has been in Europe—in just-reported numbers, the weakest growth in seven years, which is of particular concern to Africa, where a lot of the world's poor live, because their growth rate is— their ability to grow is closely associated with Europe's growth rate. As we look at a 1% or even lower growth rate for Europe, we can look to various factors. One is the structural system, labor and mobility, but one important one, the slow growth is coming at a time when the central banks are trying to be as stimulative as possible, so I want to talk a bit about that.
Europe’s slow growth comes at a time when mainstream economics considers the ECB’s policies to be massively stimulant—that's the size of the balance sheet, the expansion of the balance sheet. One interpretation of the slow growth now is that there simply hasn't been enough quantitative easing (QE) that the constraints on growth in Europe are so great that the central bank should increase its bond purchases or even buy corporate bonds or increase its holdings of low-rated sovereign bonds. The other interpretation, which I prefer, is that Europe's combined monetary and financial regulatory policies has not actually been stimulative. While textbooks teach monetarism—that's the idea that monetary actions of the central banks are multiplied through the private banking system by the way of bank reserves and reserve requirements—the reality is that we've moved to a post-monetarist world. We’re in post-monetarism. The ECB’s balance sheet has expanded many-fold in these recent years, but there's no direct connection to private-sector bank credit growth, so we have the oddity under a monetarist system, there should have been some leveraging into private sector growth, but it simply hasn't happened.
Adding to the inequality, central banks are buying long-duration government assets using short-term liabilities. That's a major distortion of markets, because the central bank purchases subsidize the least productive assets in the economy. To be productive, a market economy needs working capital, that's short-term floating rate capital, more than long-term capital, at least in the growth phase for an economy. That requires short-term financing, but much of the supply of short-term capital in Europe is soaked up by the Central Bank in order to purchase and hold long-term government bonds. The result is a central bank policy that doesn't provide monetary stimulus. It’s notable the slowness of private sector credit growth in Europe, especially for small business; despite all the targeted small business credit programs out there, it's not working.
I think it's important that economists recognize the new environment of post-monetarism. The key levers are financial regulatory policy, which itself is biased toward large existing borrowers. That's a recipe for slow growth, especially for new entrants, for small businesses, for people without much capital, for developing countries. The system is biased to provide slow growth for the people trying to get into the system. It's a recipe for inequality. I think it's important that the economic profession reexamines QE as a monetary policy tool. What it's leaving is slow, unequal growth, specifically because it sets out to channel capital into long-term government bonds. It's just not a workable system.
I want to turn to Africa for a minute and make some general points. One is that structural reforms are as critical in developing countries as they are in developed countries, that the systems that work for labor mobility, for fiscal policy, for monetary policy, for providing some means for people to have access to money and credit, and all of those are struggling in many of the developing country world. The World Bank has a major program to try to push forward with transparency of debt and investment. What this means, or the basis of that, is the idea that if you have a more transparent system, you're going to be able to attract more capital, so it's actually a recipe for more debt, more investment, and more growth, if you can have more transparency in your own system. The challenge is that it becomes very detailed in order to improve the transparency of credit markets in developing countries.
I want to list some of the challenges that we're facing. This is all particularly important with the yield curve flat, because as I described, the slowness of investment into developing countries is in part as capital gets sucked up in long-duration assets in developed countries. That doesn't leave enough for the investment that's needed in developing countries.
I'm talking about how do credits get established in developing countries? And the environment has changed dramatically over recent years. The World Bank did a report about two months ago called Four Waves of Debt, which went through and described the evolution of the debt available to developing countries. What we find now, today, in our analysis, and it was discussed at the G-20 and the G-7 that occurred just this weekend in Riyadh, some creditors are using contracts with excessive confidentiality clauses. This is new: a creditor comes into a sovereign and says, “You have to sign a confidentiality agreement.” Where these exist, we're encouraging borrowers to request relief from the clause in order to proceed with transparent data reporting.
Number two: at times, creditors may be violating legal requirements of other creditors, such as negative pledge clauses. Again, these are important because they become obstacles to new investments within the developing country, and IBRD, one part of the World Bank, has contracts with countries around the world that have negative pledge clauses inside. And so that's a protection for the people of the country, as their governments think about new types of loans. We think it would be helpful if official lenders would publish templates of their loan contracts and we invited the G-20 to endorse this suggestion and push it forward in developing countries.
I want to mention state-owned enterprise debt. One of the things going on in developing countries is you push the debt down to a subsidiary of the government, a state-owned enterprise, and that doesn't show up in the government's debt statistics, so it ends up being an obstacle to new investors, coming into the country.
Another challenge is the growth of sovereign borrowing that provides collateral for the lender. It used to be that sovereign lenders didn't provide collateral, but more and more, they have been providing collateral, and that ties up the assets of the country from other types of growth or borrowing that might have been achieved on that, so we're working with countries around the world to try to shift away from collateralizing borrowing in order to have more transparency and get more investment in.
The World Bank has a policy of discouraging non-concessional borrowing when there's concessional borrowing going on. For poor countries, we make very concessional loans and grants to the countries. That's undercut—and the work, the donors’ interest in doing that—is undercut when the country then turns around and takes on high-interest rate borrowing from other creditors. There's a policy that discourages that, and that will be pushing forward as we go into a new year of encouragement of policy.
The Transparency Initiative is to show countries that they can have faster growth and more investment if they have more transparency within their systems. It sounds straightforward, it sounds like it should be the normal policy, but I have to say that the world system right now is set up to work against that approach, so we're pushing back on that and really trying to deepen it.
I wanted to take a short moment and mention the importance of a new step in development, which is digital financial services. Throughout history, for poor people, it's been a giant struggle to actually have money, rather than barter. You know, the barter system is inherently inefficient, because you're comparing apples and oranges. You're comparing different kinds of goods and trying to trade, to make trades. It was a big innovation to monetize the world's financial system. But the problem has been, really throughout time, that it's hard to have money in the weakest parts of the global economy. It's hard for small businesses to get a hold of credit. It's hard for women to physically hold onto money because someone takes it away. Those obstacles, I think are big.
We can see an avenue to improving this through digital financial services. You can think of it as a debit card, but it's a debit card with a fingerprint, creates a great deal of security for a woman or a small business or some new entrants into the market to actually have— it starts as small amounts of money, and then it can grow, and that becomes one of the most important avenues for dynamic new growth. We're pushing hard for digital financial services to grow. That means you have to have a regular—it's not easy—you have to have a regulatory policy that encourages that kind of diversity, and you also have to have a banking system or the telecommunications system that's up to the task of keeping track of individual money for even the poorest person within an economy. It's critical to get financial transaction costs down as low as possible, so you need to be thinking about the smallest fraction of a cent per transaction cost. That enables hundreds of millions of transactions, even for poor people in countries. So, Kenya’s been a good example of a country that’s managed to set up a system that works on even the most basic cell phone, and even for the poorest person, and that's opening new businesses [and increasing] transaction volume, which people in this room—the financial market people—know how critical it is to have a high volume of low-cost transactions in order liquify the market.
In summary, I wanted to give you some sense. I'm concerned about the slowness of growth, especially the slowness of growth in Europe, and it's going to be challenged by current events. And as we think about developing countries, there's an inequality, because of the way the system is set up, that's exacerbating the challenges. A lot of it is their own structural reforms, and we can hope for better systems. I work every day on countries themselves and how they can get a better system going in their own country. But we need more transparency in the debt and investment policies, and I think digital financial services provide one avenue to achieve that. Thanks very much.
MODERATOR: Wonderful. Thanks very much President Malpass for those really insightful and wide-ranging comments. One of the benefits of being the moderator is you have monopoly of the first question or two. So, I have a few questions related to some of the comments you have made. And then I'd invite everyone in the audience to submit questions. I don’t think there will be any shortage of questions.
So, I have been coming to this conference for a very long time, and as you mentioned, you have as well. And we spend a considerable amount of time discussing frustratingly weak potential growth. And I know this is something you’ve spent a lot of time thinking about. In your mind, what are the building blocks of strong and sustainable growth? And how does the World Bank think about this? What’s the framing?
MR. MALPASS: I’ll tell you my view and then bring in the World Bank. I think economics is pretty clear that you need to have some money as a starting point. You need to have a system of taxation that's not too distorted. I think that's best done by having taxes at a low rate on a broad base. That's the revenue creation goal of a tax system. Governments that provide restraint on their own spending, but more importantly provide a regulatory framework for people to operate in a free environment. That means the rule of law. That means some clarity in terms of how the rules and regulations change over time. And so those are critical in order to getting growth because we know that growth comes from people, and often people at the bottom, having an opportunity. This idea that was featured at the G20 this weekend of an ‘opportunity society’ is, I think, really important—that people have to feel like they can try something and see if it works. Either that's a new kind of job skill, or changing colleges or other things, or getting to go to high school, even. For a lot of developing countries, the first step toward growth is being allowed to go into seventh grade or eighth grade, which in a lot of countries still is not allowed.
As far as how does the World Bank interact with that system: the Bank is active in governance processes and rule of law. One of the things in the Transparency Initiative that I can go through for you is the importance of knowing within a country who has the right to sign a contract on behalf of the government, because many countries don't have clarity on that. So you're the lender; you come in, and you get Joe or Janet to sign the contract and it hasn't really been scrutinized by other parts of the Government. We want to see a governance process that can make some sensible choices. We can provide technical assistance to build the capacities, because a lot of countries just don't have the people that can think about the contracting environment.
You need, of course, to have an environment that invites new investment—both private sector investment and infrastructure investment, some of which comes from the governments themselves. We do a lot of work in that area. And vitally important is human capital, which is people’s skills and the education system. We have an education poverty index, the Learning Poverty Index, which is a simple measurement that’s done globally for a lot of countries, maybe over 150 countries, which asks: of children at age 10, what percentage can read a basic story? It's a simple indicator, and it allows you then to tie back to countries: Why? What's the obstacles? And really focus on more learning. Health is critical and there's a lot of time on that. Climate and the environment and the ability to withstand changes in climate and extreme weather conditions is important for a huge portion of the world’s poor. They tend to live closer to sea level, or—that’s a broad statement—but many of them, millions and even hundreds of millions live close to sea level without very much protection. And other aspects of that are important. The Bank works in all those areas but the starting point, I think, is the structure of an economy That’s basically market-based rather than monopolies. One of the hardest things that we fight against is capture by state-owned enterprises or by the military. Many countries still have systems where there's a bias in favor of businesses owned by the military or by state-owned enterprises, and that really undercuts the innovation of the economy.
MODERATOR: Very good. So staying on the growth theme for just a moment, one of the things you mentioned was female labor force participation and one of the things that was brought up yesterday by Federal Reserve Bank of Cleveland President Loretta Mester was really the very significant increase in the female participation rate, here in the US. And when I was researching ideas to pose to you, I was quite struck by the decline globally in the female participation rate, from some of the data from the World Bank. How do you think about female engagement in the labor force and the dividend for growth?
MR. MALPASS: This is one of the strongest points of economics—you know, economists can argue about 2.5% growth or 3.5% growth, but one thing that that they can agree on is the vital portion that women can provide into an economy, and we see it every day, in terms of women being just additive from a straight GDP standpoint, but then also very importantly, creating different kinds of innovation than a man might think off. Oftentimes being better at negotiating a favorable outcome than a man might be, so getting that participation is vital, everywhere in the world.
Some countries are going up, and we've been encouraged—the World Bank does a lot of reporting on this. I was just in Dubai a week ago for the Global Women’s Summit. One of the things the World Bank tries to do, and does very effectively, is lean on governments, often male-headed governments, to change the laws of the country so that women can own businesses or can have a passport or can take a job in different sectors of the economy, can have pay that goes up rather than going sideways. And it's been actually I think one of the bigger successes of world development over the last let's say 10 years because it's relatively recent that countries are changing their laws to allow fuller participation by women in the economy, and then they get better results out of it.
We do an important report called the Women, Business and the Law, WBL, which documents the rules changes. One part of development is just keeping track of which countries actually change their laws in a positive way that empowers women. It just came out two weeks ago; it's a big report, and it gives a blow-by-blow of which countries were making progress. I'm cautiously optimistic, but to your point: I was in Pakistan in October, and the participation rate for women in their economy is still really low. Like 25% even. And so what that means is a whole group of important economic contributors is screened out at the get-go. They have an additional problem which is girls go to school for a while but then they stop and they’re not schooled in Secondary Schools and much less in higher education that's readily available for girls. That leads to lower skills. We could spend the whole hour on this topic because it's one that's clearly economically beneficial. There is some progress being made, and it's identifiable enough what needs to be done in which countries in order to get more progress.
MODERATOR: Interesting. So, staying with the theme of the building blocks of growth. Another topic that came up yesterday in a really great session—get the slides if you haven't seen them—it was the climate change session. You know research suggests that the effects of climate change will disproportionately affect the countries that are already struggling to develop, as you mentioned. Is the solution well-targeted public and private investment, and how is the World Bank thinking about the drivers of growth, and climate change? It’s a fairly broad question.
MR. MALPASS: Let me address that by, I’m not sure I got the whole question, but the answer is, what the World Bank is doing. So, there is a big program in order to invest or make loans in ways that address climate issues, and countries have different programs in what they're trying to do within their climate commitments that the Bank can support those. Over the next five years there's a target, a commitment by the Bank of doing $200 billion in climate co-benefits. To put it in perspective, there are lots and lots of international organizations from the United Nations to the European Bank for Reconstruction and Development, if you’re familiar with the IMF, and on down. All of those, if you put all of the rest together, the World Bank does half of the total in terms of climate and environment investments in countries.
The types of things that are done are adaptations so that people are prepared for climate changes and for extreme weather conditions and our lives are preserved. There's disaster relief—I was in Mozambique in April after the Cyclone hit, and the World Bank can provide immediate funding and has Windows or tools that are fast dispersing. A lot of times, the biggest thing that can be done is responding quickly. And then there's preparedness. We strongly encourage and work with countries on ways that they can be prepared for change. And there's all sorts of mitigation, so we think about low carbon. There's around the world still glaring anomalies within the carbon environment: Germany continuing to burn a lot of coal; Pakistan still signing contracts for new coal, and in other parts of the world still, an expansion of that. And then there are a lot of developing countries that still have such difficulty in their electricity sectors that they're using bunker fuel and diesel fuel to make electricity, which is one of the most costly parts of a higher carbon environment that we're in. Those are all different aspects of change that can go on and I think focusing country by country and region by region on things that will really improve the outcome is really where people can be focused.
MODERATOR: Thank you.
MR. MALPASS: Yeah, I you know I’ve left out, there’s a whole range. Water usage is a critical part of the whole eco-system and that gets into the crop cycle. The Bank is very involved in trying to help countries use better fertilizer, much lower quantities of fertilizer that that will allow more productivity for crops. One anomaly, or one harmful thing in the world is countries choose to grow crops not based on whether it's environmentally sustainable, but whether there's a special interest that wants that crop, whether it's cotton or rice or wheat in parts of the world that don’t need those, and on down the list. In the US, we're aware of the sugar anomaly, and it uses up, it drains a lot from other environmental resources.
And I wanted to mention also one of our bigger new programs is in China—the marine plastic problem. China has fallen into the habit of putting plastic into rivers and then it goes into oceans. Many are aware of that as a major problem within environmental processes so we're working on it; we have a loan going through right now that addresses how farmers use plastic, to try to discourage that plastic from finding its way to rivers, which is an important new aspect so we're doing the marine plastic undertakings in Indonesia, in the Caribbean, and other places to try to reduce that overhead.
MODERATOR: Let me go to some of the questions that we have in the few minutes that we have left. It's always interesting, the questions you submit when they're anonymous. So is the World Bank operating differently versus the previous administration. If so, how?
MR. MALPASS: Thanks, I began with the World Bank in April 2019. To an extent there’s a lot of inertia in organizations, but I think we're making very positive changes. One of the things I've wanted the Bank to do is focus on good development outcomes. That means country by country and region by region, for example for the Sahel or the Horn of Africa, and that focuses this big, very talented staff on thinking about how do we get a good outcome in Nigeria, how do we get a good outcome in Ethiopia, and around the world, in China and India and other places around the world.
I think it's a good healthy focus for the Bank and people are really energized about that. We're doing what we call a realignment or a global footprint to put more resources near the client. The bank has a huge number of offices around the world and we will be putting more practice managers into regional offices, rather than DC, which allows them to connect well with clients and do the job well within that. And it's putting the resources, and the decision-making in a shorter process. Those are all inside baseball; they’re ways to make the Bank function well. We’re in the process of recruiting a new chief economist, and the economic role is very important in the Bank. We also have two new very senior women in the Bank. Mari Pangestu is in DC this week, I'm very happy that she will start at the Bank on March 1. And Anshula Kant became our Chief Financial Officer in September. These are very strong, luminary women at the top of the Bank. Anshula Kant was just at the G20 in Riyadh this weekend with Finance Ministers from around the world. She's speaking on behalf of the Bank and showing the strength of the leadership of the World Bank in terms of addressing some of the challenges. People all want to talk about what the challenges are, but what I'm trying to do is have us focus very much on individual solutions—let’s break it down for this country, what change can we actually hope for and encourage?
MODERATOR: That actually speaks to the next question. Maybe our last question, we will try to sneak in two. You highlight the ways that the current policy mix in Europe may not be working. What are the specific policies, you would advocate for changes?
MR. MALPASS: People have written for 20 years about this. One is labor mobility which I mentioned, meaning the ability of people to change jobs, and to get new skills. That just hasn't been working well. Small business credit is the second major problem for Europe, and I think we have to examine is central bank policy where they buy long term government instruments so that's a heavy bias in the system away from where you’re trying to go which is to get small business dynamism started up. Of course, the efficiency of government spending is important, but some European countries have better systems than others in that, so I would say better uniformity around Europe on the quality of government spending would be important. I think the regulatory policies have to be looked at as far as why is it that a lot of the innovative capital and innovative investing is done maybe from Europe, but into places where the businesses start somewhere outside of continental Europe. That should be a focus.
MODERATOR: Interesting. And one last question before we wrap up. What is the World Bank's response to the coronavirus outbreak?
MR. MALPASS: [Inaudible] Coronavirus is topic number one. We are looking at ways to respond or to make available resources for developing countries, as it goes and we're also very closely coordinated with WHO, the World Health Organization, which is one of the frontline providers on that. We have a range of tools that the Bank can use as a pandemic spreads.
MODERATOR: Please join me in thanking President Malpass
[Applause]
This transcript has been edited for clarity.
