Tuesday, March 28, 2023

The tricky task of turning the World Bank green

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Hello and welcome back to Trade Secrets, to which I’m returning after a short break. Many thanks to Aime Williams for filling in last week. If you missed it, here is her intriguing account of how the transatlantic row over electric vehicle tax credits has widened and metastasised. Sharp-eyed readers will note that both last week’s newsletter and now this defer yet further the occasion when Trade Secrets doesn’t mention US president Joe Biden’s EV tax credits. It’s only a matter of time before I have done with it and renamed this newsletter Electric Vehicle Subsidy Transatlantic Argy-Bargy Secrets. Today’s piece is on the new leadership at the World Bank. Charted Waters continues the green energy theme by looking at the market for solar energy.

Get in touch. Email me at alan.beattie@ft.com

Running the bank: the who . . . 

The nomination of former Mastercard chief executive Ajay Banga as president of the World Bank is at least a reasonable effort in box-ticking by the Biden administration. Being an American with a business background will help keep Congress happy and funding the bank, a central reason for the US lock on the presidency. Meanwhile Banga’s strong Indian credentials give at least a nod to developing countries’ concerns that it’s time they had a go.

Appointing a business type without extensive development experience or economics training isn’t necessarily a terrible idea: it’s as much a management and political job as anything. Before Banga, who has a first degree in economics, the departing David Malpass seems to have been the only bank president with much formal economics training since Robert McNamara in 1968, and much good it did the bank and him. Banga has not previously managed a big public sector organisation and this will mean a steep learning curve, and coming into the job without a lot of personal political heft to throw around even more so.

The big substantive issue the new boss will grapple with is the bank’s role in climate finance. But first, let’s look at the job itself.

Let’s be clear: there never has been and never will be a widely-admired president of the World Bank. There are big disagreements about how to do development and the sprawling, labyrinthine institution itself contains, let’s say, the odd divergent strand of opinion. The IMF over the street has a unified ideology while the bank is a continual raucous conversation: as someone once said to me, the fund is the People’s Liberation Army while the bank is the Harvard Faculty of Arts and Sciences.

Malpass was unpopular because he was a Trumpite, suspect on climate change and highly critical of the bank before his appointment. But his predecessor Jim Yong Kim, who surprised everyone by resigning early in 2019, also alienated staffers with what they saw as high-handed and disruptive management.

Perhaps the last president fundamentally to change the nature of the bank was Australia-born former investment banker Jim Wolfensohn. Wolfensohn, a Friend of Bill (Clinton), was dynamic and politically well-connected, and successfully moved the bank beyond its economic-liberalisation-plus-building-big-dams model towards a more holistic view of development. And yet staff complaints about his style were also legion.

. . . and the what

Journalists can start writing their “New President Struggles To Reverse Underpowered World Bank’s Legitimacy Problems” stories right now, because that’s what all presidents have to do. The last paid-in capital increase for its main lending and private-sector arms was in 2018, and the bank’s transfers to developing countries continue to be dwarfed by private investment and indeed migrant remittances.

The global green transition, together with climate mitigation, have a strong development and public good element to them. The bank has quite a lot of in-house experience with environmental issues, including water management.

But it’s coming up against an old, old problem. The bank’s management has fought heroically over the years to move away from country-by-country lending to financing global public goods, but it often faces resistance from developing countries that want more traditional loans.

The bank needs more money to fund the green transition, which will cost a cosmic $125tn by 2050, according to research commissioned by the UN climate champions. The big idea is to leverage up its balance sheet, which I’ve written about before.

As my colleagues (including the great Aime Williams again) have written, ironically it’s the rich countries whose backing does most to bolster the bank’s rock-solid triple A credit rating that are keen to leverage up its balance sheet to lend more for green finance. The resistance comes from the bank’s management itself — not just Malpass but also senior permanent staff. They’re concerned that any threat to the bank’s credit rating will damage its credibility and long-term political support, whatever the rich-country governments say now.

The staff’s scepticism is shared by lower-income countries that don’t really like the idea that green transition and climate mitigation necessarily equal development. (A powerful argument along the same lines from the economist Tyler Cowen here.) Developing countries are concerned about interest rates on loans rising if the bank starts to leverage its balance sheet, and say money must continue to go to health and education rather than just modish environmental causes. Green spending based on increasing the bank’s capital: fine. Green spending based on leveraging the balance sheet: steady on there.

The rich countries look progressive while the developing countries look conservative. It looks odd, but that’s the World Bank for you. I’ll keep an eye on how it gets resolved.

As well as this newsletter, I write a Trade Secrets column for FT.com every Thursday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.

Charted waters

Sticking with matters green, the FT has today published its latest Road to Net Zero report. Apart from being well worth a read, it highlights the rather encouraging news that solar power will overtake other energy sources by 2027.

This is a remarkable achievement for a technology that a little over a decade ago accounted for less than 1 per cent of global energy production, as the chart above shows.

The reason has been the frenetic pace of solar installations across the globe. Energy security concerns highlighted by Russia’s invasion of Ukraine will only fuel this construction boom. Record numbers of installations are now planned for each of the next five years.

The catch? Well, as anyone looking out today on London’s leaden skies will appreciate, solar power production can be patchy. Some suppliers have also found it difficult to obtain permits and there is a shortage of the necessary skilled labour, creating bottlenecks and driving up costs. That has squeezed profits for some publicly listed suppliers in competitive markets. Every silver lining has a cloud. (Jonathan Moules)

A particularly good podcast from Trade Talks, this one on the mixed history of sanctions in the context of Russia and particularly its gas pipelines to Europe. For those who prefer reading to listening, the transcript is here.

The French Institute of International Relations examines the digital technology policies of eight middling powers (Brazil, India, Israel, Japan, Kenya, Nigeria, Russia, South Korea and the UK) and concludes that all except Russia are maintaining balancing acts between the three great centres of tech regulation: the EU, US and China.

The US-China shipping business remains in trouble as cargo volumes and freight rates continue their slump, with US retailers continuing to run down inventories rather than buy in more imports, though a bellwether shipping line reckons things will pick up in the second half of 2023.

The EU, dogged in its defence of multilateralism, has produced a paper calling for more “focused deliberation” at the World Trade Organization rather than concentrating just on negotiations themselves. Sounds fine in principle but unlikely to entice the US back to enthusiastic participation.

European Commission president Ursula von der Leyen is in the UK today to try to finalise the UK’s latest climbdown, that is to say agreement between equals, to fix the post-Brexit Northern Ireland problem. Meanwhile in the latest Global Britain sunlit uplands news, UK salad imports are down by more than half: poor harvests in Spain and north Africa have hit the UK more than most because of higher transport costs and post-Brexit paperwork.

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