In recent years the World Bank has lost its monopoly on development lending, with ever more countries turning to private providers and setting up new development banks. The leading one is the Asian Infrastructure Investment Bank (AIIB), which Switzerland joined in 2016. To adapt to the new environment, the World Bank Group (WBG – see below) has introduced a series of reforms. The transformation into a "knowledge bank" is meant to shift the focus away from lending towards increased policy and technical consultancy and direct project funding. Besides, in the years ahead the World Bank is keen to be more active in fragile contexts and has signalled its intention to be a pioneer in climate matters. The overarching goal of the World Bank Group as a whole for the next few years is encapsulated in the designation “Maximizing Finance for Development” (MFD). MFD presupposes better teamwork among all WBG component organizations in pursuit of the overall aim of systematically raising private funds for development financing.
The MFD approach is based on the notion that a rethinking will be needed if the Sustainable Development Goals (SDGs) summed up in the UN 2030 Agenda are to be realized. Because the billions in official development funding are not enough to fund the SDGs, the private sector should step in and provide the trillions needed to achieve the goals.
To understand how this is to work, we must turn to what is known as the cascading approach. To attain development goals, it will always be attempted first of all to raise private funds. In countries and sectors where the private sector is faltering, the second step will be for the World Bank to undertake nationwide or sectoral reforms to improve the investment climate. To minimize the risk to private parties, the third step will be to apply guarantees or risk-sharing instruments, for example in the form of public-private partnerships. Public resources will be tapped into only when sectoral reforms or risk-sharing fail to yield market-based solutions.
World Bank under criticism
The World Bank has come in for repeated criticism since the 1980s despite having helped to reduce poverty in many countries over recent decades especially through IDA mechanisms. Despite numerous reforms and increased dialogue with civil society, the World Bank continues to set a series of conditions that borrowing countries must meet in order to access cheap money. These include one-sided trade opening, financial deregulation, privatization, and the disengagement of the State. These "conditionalities" are influenced by the economic interests of the rich countries, which still control voting rights in the WBG and continue to strive for (even) better access to the markets of poor countries. The new MFD approach further accentuates this practice.
Although private sector investments are undoubtedly meaningful and important under certain conditions, there is room for doubt as to whether the approach being promoted by the World Bank truly serves poverty alleviation or whether it was not developed to ease access to developing country markets for global corporations while minimizing its own risks. Critics stress that the MFD approach goes much further than merely bringing the private sector on board for development funding. The fact is that invariably and in all contexts, the MFD cascading approach favours private development funding over public funding, without prior cost-benefit analysis or ensuring that private funding matches the public interest and will contribute to sustainable development and poverty alleviation. Because the reforms being propagated are imposed on countries by the World Bank from the top down, most of them are not the outcome of a democratic process.
Contrary to their lofty climate goals and despite their social and environmental standards, the IBRD and IFC continue to invest in major projects in developing countries that are environmentally damaging and not consistent with human rights. Among other reasons, this is down to the fact that standards are not applied equally across all fields of World Bank activity. Currently, the standards are applied mainly to direct project funding, but not to development policy consultancy services, which in some years account for as much as 40% of World Bank spending and often concern sensitive sectors such as mining or forestry and agriculture. What is more, in recent years the IFC in particular has been granting ever more loans to banks, equity funds or pension funds (called financial intermediaries), which in turn invest those funds in other projects that sometimes lack transparency. Investment in financial intermediaries operating in high-risk sectors has spiked in recent years.
Hence, at the close of 2018 there were 65 cases of human rights violations and negative environmental impacts pending before the IFC's Independent complaints mechanism. A years-long study by the NGO Inclusive Development International further confirms the existence of negative social and environmental impacts as well as human rights violations in 150 projects funded by financial intermediaries. Over the past 10 years, IBRD-funded projects also elicited 32 complaints filed with the Inspection Panel – the independent complaints mechanism of the IBRD and the IDA – many of which concern large-scale infrastructure projects.
Switzerland's interest
Already a member of MIGA and ICSID, Switzerland joined the IDA, IBRD and IFC in 1992 and has since then participated regularly in their capital increases and in replenishments of IDA funds, which are reserved for the poorest countries. As things stand, not only has Switzerland embraced the World Bank's discourse – that of aligning development work more closely with private sector interests – it is also likely to take part in the upcoming IFC and IBRD capital increases and thereby assist the World Bank implement its MFD strategy in developing countries. Not only will this help preserve its voting right in this influential institution but will also further its own economic interests. The IFC in particular co-funds various multinational firms, banks and medium-size corporations that are domiciled in Switzerland and keen to invest in emerging markets. In 2018 the IFC's portfolio of long-term investments in Swiss firms was worth US$1.4 billion – and is likely to grow even more given the aim of further privatizing development.
The World Bank Group (WBG)
comprises five component organizations:
- The International Development Agency (IDA) which provides long-term interest-free loans and grants to least developed countries.
- The International Bank for Reconstruction and Development (IBRD), which lends to middle-income countries.
- The International Finance Corporation (IFC) which grants loans to private enterprises.
- The Multilateral Investment Guarantee Agency (MIGA), which guarantees foreign direct investments abroad and advises investors
- The International Centre for Settlement of Investment Disputes (ICSID), which mediates disputes between foreign investors and governments.
The WPG operates like a financial cooperative whose members are the 189 member countries. The latter hold voting rights based on paid-in capital as well as the size of their economy. Given its high level of reserves, the Bank also raises preferential loans on international credit markets, which it can pass on to developing countries. Unlike commercial banks, the WPG supplements its financial services with development policy consultancy and other kinds of support. Lending is often tied to development policy conditions, however. The WPG exerts considerable influence in the setting of common standards and guidelines for various aspects of development cooperation. While IDA funds are regularly replenished, capital increases take place only sporadically when special circumstances so dictate. Another such increase is now imminent for the IFC and the IBRD.