Reforming the World Bank

I spoke in Parliament yesterday on reforming the World Bank.

International Financial Institutions Legislation Amendment Bill 2010 
Second Reading
17 Nov 2010

Dr Leigh (Fraser) (10:04 AM) —According to the World Bank, there are currently around 900 million people in the world living on less than a dollar a day. The World Bank calls this extreme poverty. That means there are 900 million people who woke up today to try to feed a family on approximately what many of us in the room would have spent on our morning coffee.

Oxford development economist Paul Collier, who is visiting Australia next week, has referred to this challenge as that of lifting what he calls the ‘bottom billion’ out of poverty. These are the people living in countries that have experienced stagnant growth rates and where flows of aid in the past have frankly not done what we hoped they would. On balance, aid has raised living standards but we know that mistakes have been made. We know that foreign aid requires more than good intentions.

Effective development economics requires an ongoing assessment of what we do and a critical focus to balance the optimism and the best of intentions that go with our aid programs. I very much appreciated having the opportunity to speak with various groups in my electorate about these challenges we face in overseas aid—groups such as Micah Challenge, World Vision and Oxfam.

Essential to what Australia does in the foreign aid portfolio is the modernisation of the multilateral banks. These institutions have been critical in the fight against global poverty and it is important we make sure that we as Australians do what we can to make sure that the multilateral banks continue to respond to new challenges. Australia’s engagement with multilateral organisations extends the reach and scope of Australia’s country and regional aid programs.

The World Bank is one of the central partners in Australia’s aid program. Its convening power allows it to lead donor coordination at a country level and a sectoral level. In days like these it is worth mentioning that the World Bank is a bank that we can be proud of.

The International Financial Institutions Legislation Amendment Bill 2010 will do two things. Firstly, it will give effect to Australia’s G20 commitments to ensure that the multilateral banks have sufficient capital to be as responsive and flexible as possible in the environment that follows the global financial crisis. Secondly, the bill will also allow Australia to adopt a proposed amendment to the articles of agreement to the International Finance Corporation—the IFC—and four amendments to the Multilateral Investment Guarantee Agency Convention that have recently been adopted by that agency’s council of governors.

Australia’s increased investment will also allow the World Bank to provide lending to middle income countries, such as Indonesia and China, to support their recovery. The investment will provide greater resources for those in the ‘bottom billion’ and will also allow for more rigorous evaluation of what works in increasing living standards and what does not work.

Growth in developing countries during the period of the global financial crisis fell from an average of about seven per cent in the preceding five years before the GFC to just 1.6 per cent in 2009. That has meant that an additional 64 million people around the world have been thrown into extreme poverty—the equivalent of feeding a family on less than the price of a cup of Australian coffee.

World Bank lending is playing a critical role in supporting recovery in developing economies and therefore supporting recovery in the global economy. Some developing countries are doing well—China of course comes to mind—but the crisis is going to have significant lasting impacts by increasing the poverty of the most vulnerable people in the world.

The World Bank and the IMF played a key role in the crisis. Indeed, I cannot resist pointing out on this occasion that when the IMF looked at Australia’s policy response, it was one of the international organisations—though by no means the only one—that noted that Australia’s fiscal stimulus was timely and appropriate to the needs of the crisis. Direct responses included US$750 billion by the IMF and US$235 billion by the World Bank. In its recent meetings, the G20 has committed to achieving an extra $US350 billion in capital increases for the World Bank, which will allow the World Bank to nearly double its lending.

The G20 is also committed to ensuring that developing countries increase their voting power within the World Bank. It is these voice reforms which the legislation today is going towards. It is important that Australia demonstrates commitment to the G20 agenda by ensuring prompt implementation of these reforms.

Australia has much to gain by increasing its support for the World Bank. Subscription to more shares shows Australia acting as a good international citizen, particularly in response to the global financial crisis. It is also in our national interest to live in a world with less poverty. Australians have shown through their individual contributions to non-government aid that they believe passionately that a world without poverty is a goal worth striving towards. I believe Australians want their government to work towards the same goal. The capital increase demonstrates the government’s willingness to be a global leader on issues related to development and our commitment to the World Bank. It fulfils the G20 commitment to ensure adequate capital resources. In this sense, the reforms we are speaking about today are of a piece with the review of the aid program announced by the Minister for Foreign Affairs this week.

These amendments introduce no substantial changes to Australia’s obligations to either the IFC or the MIGA. Australia’s actual shareholding will remain unchanged as a result of the increase in basic votes, while its voting share will decline marginally—and I will come to that issue in a moment.

First, I want to briefly mention what the World Bank and its various arms do. The overall goal of the World Bank is to provide financial and technical assistance to developing countries around the world, but it does that through five separate arms: (1) the International Bank for Reconstruction and Development, IBRD, is the oldest arm of the World Bank and its goal is to reduce poverty in middle-income countries and creditworthy poorer countries, operating in the traditional way that the World Bank has since its inception; (2) a newer arm of the World Bank, the International Development Association, IDA, focuses on the world’s poorest countries. Their work is complemented by that of the International Finance Corporation, IFC, the MIGA and the International Centre for Settlement of Investment Disputes; (3) the IFC contributes to the World Bank’s overall poverty reduction mandate by operating with the private sector in both middle- and low-income countries. The IFC is the largest provider of multilateral financing for the private sector in the developing world; (4) the MIGA promotes foreign investment into emerging economies by offering political risk insurance or guarantees to investors and lenders. It also provides technical assistance and advice to help developing countries attract and retain that critical foreign investment that can allow them to grow out of poverty; and finally (5) the International Centre for Settlement of Investment Disputes is an autonomous institution that supports foreign investment by providing international facilities for conciliation and arbitration of investment disputes between foreign investors and their host countries.

The World Bank’s work focuses on overcoming poverty through inclusive and sustainable globalisation. The World Bank seeks to alleviate poverty in developing countries by building the climate for investment, jobs and sustainable growth and by investing in and empowering poor people to participate in development. Participatory development is a critical arm of the new strategy to bring more people in the world out of poverty. Together, the arms of the World Bank provide low-interest loans, interest-free credits and grants to developing countries for a wide array of purposes that include investments in education, health and public administration; infrastructure; financial and private sector development; agriculture and environment; and natural resource management.

The reforms that this bill envisages are part of a new World Bank strategy that arose in its 2010 meetings. The World Bank has set its strategic priorities as follows: to target the poor and the vulnerable, to create opportunities for growth, to promote global collective action, to strengthen governance, to manage risk and, importantly, to prepare for crises. Australia is a strong supporter of the new World Bank strategy. Australia is supporting the World Bank’s key role in promoting development. It is worth remembering that the World Bank only employs about 10,000 people—half the number of the Australian Taxation Office—and over 3,000 of those employees work in the more than 100 country offices in the developing world. Many of my friends, including Patrick Barron, have spent time working in those different World Bank offices. I have seen firsthand, in visiting the World Bank offices in Jakarta, the important work that is done in those field offices as well as in the central office in Washington, DC.

I mentioned that I would come to the issue of reduced voting power, because it is obviously an issue that raises an eyebrow to be bringing forward legislation which reduces Australia’s voting share. The first point that is worth making about this is that the reduction is very small. Australia currently holds 1.49 per cent of voting power, and this will be reduced to 1.33 per cent following the second phase of voice reforms implemented in this bill. It is a small decrease which is part of a large package of reforms, recognising that the World Bank has to keep pace with changes in the world economic environment and that, if we do not modernise the World Bank, the institution risks becoming out of date and not serving those who need it the most.

Shareholding in the World Bank, including the IBRD and the IFC, is subject to periodic capital increases. Australia last subscribed to additional shares through the International Bank for Reconstruction and Development (Share Increase) Act 1988 and the International Bank for Reconstruction and Development (General Capital Increase) Act 1989. Australia’s total shareholding in the IBRD totals 24,464 shares and in the IFC totals 47,329 shares.

In conclusion, Australia has been part of the multilateral banks since the very beginning. Indeed, you might ask why we were not there from 1944. The answer actually comes back to the history of my own party when it was first faced with the Bretton Woods agreement in 1944. In his biography of Ben Chifley, David Day points out that it was Chifley who wanted his colleagues to ratify the Bretton Woods agreement immediately in 1944. But he delayed it because he faced considerable opposition within caucus, particularly from Eddie Ward, and he eventually pushed back. As David Day writes:

Chifley had a vision of a postwar Australia that would put the 1930’s depression behind it forever. It would be an outward looking country engaged with the world through trade, diplomacy and economic aid.

After his caucus colleagues supported the Bretton Woods agreement—though only by 33 votes to 24—Chifley told this House:

Perhaps the experiment will fair. But no country which has any regard for the cause of humanity can, for some selfish reason or because some ghosts of the past happen to walk or because of fears created by their experience of a financial and economic depression, refuse to become parties to this agreement. If we have any love for mankind and desire to free future generations from the terrible happenings of the last 30 years, we must put our faith in these organisations.

Australia has done that. The ninth World Bank president—and one of its most successful—was Australian-born James Wolfensohn, who served from 1995 to 2005. More broadly, Australia as a nation has been a consistent supporter of the work of the multilateral banks. As the bank modernises, so must our policy response. We owe nothing less to the world’s poorest.

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