A nervous World Bank embraces Wall Street

A nervous World Bank embraces Wall Street

In the fall of 2016, Jim Yong Kim, the president of the World Bank, sat down with some of the most powerful figures in the global economy.

Hosted by Christine Lagarde, the head of the International Monetary Fund, their discussion focused on financial trouble spots around the globe. There was scant talk about poverty, which the World Bank has committed to eradicate. And as such, there was no cause for Kim to join the discussion in a meaningful way.

"I sat there and thought, 'We are completely irrelevant to the majority of these countries,'" Kim recalled. "The IMF is a systemically important financial institution. But we are seen as just a bunch of do-gooders."

The World Bank, once a powerhouse of global finance, is searching for relevance. Kim's unusual solution: embrace Wall Street. For decades, the World Bank followed a simple formula. Developed-world governments that are the bank's members provided the bulk of its money, which was used to make loans to developing nations for infrastructure projects and the like.

But that model is under strain. Some 1.3 billion people still live in extreme poverty, and the bank's war chest is dwarfed by the funds pouring into developing countries through financial markets. Perhaps most important, the bank's biggest benefactor and shareholder - the United States - has become its most trenchant critic.

Kim's mission is to revitalize the World Bank by increasing its firepower and winning over the United States. To do so, he is fundamentally, and controversially, changing how the bank operates.

Instead of relying solely on contributions from reluctant donor governments, he is pushing private investors - sovereign wealth funds, private equity firms and insurance companies - to pony up trillions of dollars for projects in Indonesia, Zambia, India and elsewhere. His pitch: They can reap rich returns by putting their money to work alongside the World Bank.

The World Bank was founded at the end of World War II, part of an effort to remake the international financial system in a free-market mould. Through subsidized loans, the goal was to stimulate recovery in ravaged Europe and, later, economic development in the world's poorer parts.

The dams, pipelines and roads that these loans built spurred progress. They also stirred controversy when the bank was criticized for environmental destruction and supporting despots.

Along the way, an entrenched bureaucracy of economists and development experts took shape. Resistant to change, they sustain and defend the bank's original mission: funnelling loans to emerging economies.

Via the International Finance Corp., which is its private sector lending arm and provides cash to companies in exchange for equity stakes, the World Bank drums up more than $7 billion a year from the private sector to invest in ventures in the developing world. Kim wants that figure to eventually increase to $30 billion.

In 2016, the bank announced a $5 billion deal to raise cash from insurers like Allianz and Prudential for a vehicle that would invest in infrastructure projects. The World Bank promised to protect investors against some losses.

There has been a $500 million bond offering and derivatives offering to fight disease outbreaks. The bank formed a $1 billion partnership with the private-equity firm Apollo Global to buy debt in developing countries. Kim is creating a venture with Credit Suisse to let clients invest in certain World Bank projects. And money is being raised for a $2 billion fund, managed by Amundi, the French investment giant, to buy bonds that finance environmentally friendly projects.

Kim is conducting this experiment at a perilous time for the institution. The U.S. government is the bank's largest shareholder, with a 16 percent stake. Under President Donald Trump, it has been openly sceptical about the bank's mission.

The Middleman

It was 8 a.m. at World Bank headquarters in Washington, and Kim took his seat at the boat-size table that dominates the bank's boardroom. Its vast length evokes a more majestic time for the bank, when its voice - and loan book - loomed large across continents.

Kim, 58, was on a video feed, urging financiers in Egypt, Jordan and Tunisia to put more of their own money to work in local markets. In effect, he was pitching the bank's services as a middleman, ready to back projects with guarantees and other incentives. No longer could the World Bank be the sole provider of loans, which, he said, are "crowding out" the private sector.

Kim is, by nature, a cheery person, but there was no mistaking the edge to his voice when he started talking about the World Bank economists whose pay is tied to how many loans they churn out. In his view, the bank needs to reward its staff, Wall Street style, for devising innovative financial solutions.

"One of the most difficult things to do in a large bureaucracy is to change incentives," Kim told the financiers. "And if you have a large bureaucracy full of economists it is especially hard, because it turns out that economists really hate it when you change the incentives."

Kim is looking to change staff behaviour with positive reinforcement. On the video call, he singled out a lending executive who, instead of simply signing off on a World Bank loan to help Jordan build an airport, created a package that relied heavily on private sector finance.

"He had to work against his own incentives," Kim said, referring to the bank's practice of rewarding staff members for loans. "And that is part of the institutional problem here."

Kim's public criticism of the staff has struck a nerve. "He has pursued a strategy of making himself popular in Davos by attacking the organization and its staff," said Lant Pritchett, a retired World Bank executive. "It is this idea that his hand has been hampered by bureaucratic machinations. That may be accepted in Davos - but it's completely false."

Kim's advisers say morale at the bank is improving and that the workforce understands the importance of luring more private sector cash.

But Kim's motives are more complex than keeping employees happy or even finding the best financial solutions for poor countries. He needs to win over the Trump administration - a task he has attacked energetically.

When talking about his relationship with the administration, he drops the names of White House players. "Ivanka, Jared, Gary Cohn, Dina Powell - they all know our business model very well," Kim said.

His biggest coup was working with Ivanka Trump, the president's daughter and senior adviser, on the Women Entrepreneurs Finance Initiative, which the bank introduced in October and which has raised $340 million. World Bank staff members sniff at the project, which they have nicknamed the Ivanka Fund. Outside the institution, however, the project was seen as a savvy move by Kim to outflank his critics at the Treasury Department.

In his few meetings with the president, Kim has tried to present the bank as a tool to enhance the administration's "America First" policy. That could mean generous loans to strategically important countries or even providing expertise for U.S. infrastructure projects.

Some critics at the bank think Kim has become too dazzled by boldface names and billionaires. He golfs (very well, by all accounts) with Michael R. Bloomberg - who has backed several projects at the bank and hails Kim as a "doer" - and swaps books with President Emmanuel Macron of France, most recently sending him a copy of "Orientalism," Edward Said's critique of Western attitudes toward the Middle East and Asia.

Kim's turn at the Paris environmental summit in December was an opportunity to trumpet the potential of his reimagined institution.

The World Bank has been trying to shed its less-than-green image, and it was a main sponsor of the event. Kim had promised Macron that he would announce some eco-friendly deals.

Kim strode onstage and started talking deals. There was a bid to attract $2 billion in private capital to protect coastal shores in West Africa; a $4 billion scheme to back geothermal energy in Indonesia; the establishment of a global investment bank to spur environmentally friendly investments in cities; and a big bet on electric cars in India.

All would be blessed by the bank. But their ultimate success would hinge on how much the private sector would kick in.

Kim concluded by announcing that the bank would no longer back oil and gas drilling projects. A roar of applause filled the auditorium. Kim grinned.

For the moment, at least, the World Bank was relevant again.

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