Along with other Indians and people of Indian origin, I celebrate the confirmation of Ajay Banga as the next President of the World Bank. It’s noteworthy that he describes himself as “Made in India.” Surely, India has been doing something right all these years that it could produce a person like him.
But there is a catch. As a long-standing World Bank consultant, I agree with his critics who say he lacks experience with the World Bank’s work. And he has no experience in running an institution with qualified, motivatable staff who can readily slip into a bureaucratic slowdown in the absence of inspiring leadership. He has a lot to learn- and quickly.
On the other hand, he has the expertise to reduce a serious barrier to scaling-up infrastructure and climate-related projects in developing countries, both of which are now high priority, including in India. This barrier is that the financial sectors of developing countries are not developed enough to co-finance a scaled-up program of such projects. This lack of development is a serious problem even in India, which is forced to rely mainly on limited government funds.
These projects usually have their total costs loaded upfront. So, a scale-up means high capital costs, which must be financed before there are any results/revenues. Developing country governments have many other priorities, and there’s a limit on how much well-off countries will allocate for this cause. The World Bank does not have enough money, even if it pools its money with other development banks.
This shortage of official funds makes it essential to get private money into infrastructure and climate change projects. This private money should be mainly local so that there are no exchange rate issues when the time comes to repay the foreign loans used to finance such projects. In any case, foreign financiers face the risk of a future decline in the local currency’s value when the time comes to repatriate their money. This risk raises the cost of foreign private funds.
This lack of private money is already holding back ongoing on-the-ground projects. Modern roads require large amount of money upfront. Even as India is building roads much faster than in the past, we are just getting started, and need to build many more than possible with just government budget funds. Similarly, India’s railways have to upgrade the tracks so that trains can run faster, but it’s difficult to fund these projects with just government funds.
The problem is that India’s financial sector lacks the financial systems that would allow people to channel their savings into these projects while earning a reasonable, relatively safe return. There is always some risk in these projects, and it is the job of the financial system to allocate this risk to those who are not risk-averse. But this is missing in India.
If the World Bank led by Mr. Banga can get private financial institutions in India and other developing countries to co-finance infrastructure and climate change projects, there will be a significant spillover benefit for poverty reduction and equitable economic growth.
Further, currently, most small firms cannot get enough local private funds. For example, India has a program under which the government lends money to small firms, as local financiers won’t do it. Even Indian technology start-ups look to foreign sources for their money. These are all indications of a financial system that is not well-developed.
While large firms get local money readily, they don’t create enough jobs for the huge number of young people coming of working age every year. Most of them will have to find work in small or informal sector firms, which are ill-served by local financial institutions.
Unfortunately, no authority in India or most developing countries is even looking for ways to channel domestic savings into infrastructure/climate projects, small firms, or start-ups.
Since Mr. Banga is a finance expert, he understands these issues better than previous World Bank Presidents, who had no background in finance, even though they were running a financial institution. And most developing countries, including India, are still dealing with the World Bank on a regular basis. Thus, he could use the Bank’s clout and expertise to help developing countries, including India, to develop their financial systems. This would set them on a path of economic growth on which they could finance many major projects on their own.
None of this will be easy. Seemingly doable schemes often hit barriers in the real world. But what’s clear is that Mr. Banga has the potential to be a World Bank President who can help developing countries to self-finance their economic development.
About the Author
Subodh Mathur, an economist (Ph. D. MIT), has worked in many countries. He is the author of the book called ‘India's Path to Prosperity 2022-2047: A Workable Agenda for the Next 10-15 Years’.