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Statement by Mr. Ashok Chawla, Secretary, Department of Economic Affairs

We meet today at a crucial meeting which is set to take momentous decisions. We have in front of us an ambitious agenda. We have proposals on making important changes to the governance structure of IBRD and IFC to enhance the role of Developing and Transition Countries. We have a proposal to enhance the capital base of IBRD  for the first time in decades. We are here to reflect on the future directions of the World Bank Group in the context of current and emerging challenges and also on the changes that need to be made to its internal structures and processes in order to keep it relevant and effective. Any one of these issues is an important one in itself. Taken together, they are transformative in nature and will reposition the World Bank Group in the international financial architecture.  

 

Over the years, the World Bank Group has played an important role in the fight against poverty.  It can justifiably be proud of its record on many fronts. Its success is evident through the number of borrowing countries that have graduated to higher levels of development. Millions of people have been lifted out of poverty as a result of the efforts of the Bank. The ongoing economic crisis has demonstrated the need and continuing relevance of an institution such as the World Bank. It has done excellent work during the crisis. The tripling of IBRD lending, the innovative financing by IFC and the accelerated assistance by IDA have played a significant role in mitigating the adverse effects of the crisis. We commend the President for his leadership and the manner in which he has expanded World Bank Group assistance on all fronts.  

 

The changes we are considering are essential. Taken collectively, they will strengthen the role the World Bank Group in being an effective multilateral instrument for eradicating poverty, achieving the MDGs, supporting international efforts to manage global public goods, and most importantly, keeping it relevant in a dynamic world.  

 

Global Economic Scenario

The last two years have been a difficult one for the global economy. The financial and economic crisis has severely affected economic growth in developing and developed countries. While recovery has begun in many developing countries, the shoots are still tender and the recovery, uneven. The recovery can be easily upset by minor shocks and fluctuations. Most significantly, the altered financial landscape has adversely affected the growth potential of developing countries. Costlier and more scarce finance would reduce annual growth rates by a few points. This is a permanent change in growth patterns. While the macro-effects of this need to be observed, it is certain that poverty reduction efforts and achievement of MDGs will see a setback. There is a perceptible increase in poverty as a result of the crisis which has had a disproportionate impact on poor households. Most importantly, the long lasting effects of the crisis will be felt through delayed escape from poverty, higher infant mortality rates, lower school enrolments and poorer nutrition levels. Millions will be affected by these effects and we need to redouble efforts to recover lost ground.  

 

While developing country governments are trying to battle the crisis, many need additional help to bridge resource gaps. The MDBs, particularly the World Bank Group, have an important role to play in meeting some of the financial needs of developing countries as they try to maintain essential social and development expenditures.  

 

Financial Capacity

In this context, the demand for World Bank assistance is understandable. We believe that the days of depressed demand for Bank assistance are over. The coming years would see sustained demand for Bank assistance – both in the public sector and the private sector – to fill financing gaps which have opened up.  

In this context, we are happy that finally, after a year-long debate and discussion, we have come to a point where we can agree on enhancing the financial muscle of IBRD. This institution has a central role in enabling millions of poor and vulnerable people in the world lead a life free from poverty. It has played this role in the past, is doing so in the current crisis and we are confident that with this capital infusion, will continue to do so in future. The Bank could have made its case in 2008 itself and it would have got overwhelming support from all Members just as the IMF got. We are happy that there is an emerging consensus on the issue of a capital increase for IBRD.

All of us stakeholders have played our roles in strengthening the financial capacity of IBRD. Borrowers contributed $ 2 billion through a 20 basis point price increase last year. We stand firmly behind the principle of having a strong, financially sustainable IBRD and to ensure this, will engage constructively in discussing measures to enable this.  

At the same time, it is our firm belief that this is not a commercial institution and must strike a balance between financial and developmental goals while determining lending terms and conditions. IBRD should reach out to more rather than to fewer countries and people. IBRD should not take decisions that once again push it to the fringes of development financing in client countries.  

On IFC’s capital needs, however, we can only voice our sense of deep disappointment. The case for enhancing IFC’s financial capacity is as strong if not stronger than for IBRD.  It has done a good job in responding to the crisis, has been innovative, and has worked to expand its role in Africa, IDA countries and frontier regions of MICs. IFC needs more capital to do justice to the multiple objectives it is asked to fulfill.  On one hand, we talk of private sector led growth, and on the other, we do not want a critical private sector financing institution to grow. We do not understand this position. We mouth platitudes for the poorest and for IDA – but do not support a path that expands IFC there. There is talk of trade-offs for IFC. How many trade-offs can IFC do if it is capital constrained?  Does it wind up activities in other parts of the world? Does it disengage from the Arab region and Asia and Latin America in order to cater to Africa as a result of its capital constraints? The poorest need our support. Let us demonstrate it by strengthening IFC.

Voice & Participation

A year ago, we set for ourselves a goal to change the governance structure of the World Bank Group and enhance the role of DTCs. This was not an altruistic goal but a practical necessity. DTCs are the customers of the Bank. The Bank’s entire effort to eliminate poverty is played out in DTCs. Further, the changing dynamism of the global economy and the evolving weights of developing economies need to be reflected in the governance structure of the World Bank. DTCs are partners who need to have adequate voice in the way this institution is run. This will make the Bank a more responsive, credible and relevant organization which is truly a development cooperative. It is only through this transformation that it can continue to play a vital developmental role.  

We are happy that we have stuck to our goal and achieved the objective we set for ourselves. For the first time in over sixty years, the Bank has determined its shareholding without basing it on IMF quotas. This is a major achievement and should not be down-played.  This arrangement will ensure that there is a shift of at least 3% in vote share to DTCs now. Although we do not have agreement on a formula, we are happy that economic weight is given due importance while protecting the voting power of the smallest poor countries. The way we have arrived at this point may not be the perfect arrangement. But the best cannot become the enemy of the good.  

However, what we have in front of us today is not a perfect set of arrangements. It is a compromise package. While it meets some of the outcomes we hoped for, it has its own flaws. For the future, economic weight must be based on a blend that gives more weight to GDP-PPP which captures the dynamism of economic growth and the real economy much better. In the current arrangement, we have had to resort to formulaic engineering of all kinds and the forbearance of some of our colleagues to achieve a 3% shift. We can live with it today. But the future composition of the blend needs to be debated further.  

We also need to recognize an important contribution to the Bank’s Development Mission, i.e., client contributions. We need to discuss further in future on how to appropriately include client contributions. As we go ahead towards the next shareholding review by 2015, we need to define a formula which is robust, reflects economic weight, dynamism of economic growth, client contributions and IDA Contributions while protecting  the smallest poor countries. We accept this package as a compromise to reach the immediate goal of at least a 3% shift. We need to work collectively to improve the formula for the future. We need an outcome which would deliver our objective of equitable voting power between DTCs and developed countries.  

In IFC’s case, we support the increase in Basic Votes to 5.55%.As for the share realignment, we will go along with the consensus for a $ 200 million SCI. However, we would like to express our deep sense of disappointment that the SCI for $ 300 million which members are willing to subscribe to has not been accepted by consensus. This would have further reduced IFC’s capital constraint and enabled it to play its developmental role in IDA countries, Africa and frontier regions of MICs. Even then, DTC shareholding in IFC would have been just 41%. By denying this to IFC, we have not let it benefit from the goodwill of those shareholders who are willing to let it grow.  

Post Crisis Directions

We welcome this opportunity for a discussion on the post-crisis directions of the World Bank Group.  The global economic scenario has undergone rapid structural change in the past decades.  Sustained periods of rapid growth in developing countries, especially the dynamic emerging economies has resulted in the economic center of gravity shifting in the direction of developing countries. Consequently, there is an emergent need for integration of the rising developing countries into the multilateral system.  The world also needs to address the challenges posed by global issues such as climate change, the need to strengthen the global trade system, address inadequacies of the international financial architecture, and to respond to agriculture and food security needs and water scarcity.  We have also recently seen how increasing global integration has also led to a situation where problems, such as the recent financial crisis, can be transmitted at great speed from one country to another.  The World Bank has an important role to play in the complex and evolving global scenario today, and, therefore, it is extremely opportune that we are discussing the post-crisis directions of the WBG.  

            We concur with the five strategic priorities of the WBG.  However, the Bank needs to strongly reiterate that its primary mandate and over-arching priority will remain the challenge of overcoming poverty. The vision of the Bank should, therefore, not be cluttered with other secondary objectives such as supporting inclusive and sustainable globalization or achieving global public goods. These are laudatory objectives in themselves, but are merely means to an end, not the end in itself.  Poverty will continue to be the long term challenge for the Bank for the next several decades, and, therefore, poverty eradication should be the primary mandate and focus of the Bank’s work.  

            We are happy that support for emerging economies and middle income countries has been recognized as a requirement for ensuring multi-polar growth and for creating new markets and investment opportunities. This will require larger investment in MICs, going beyond the traditional focus on poverty eradication and MDGs.  This also leads us to the need to differentiate the approach for IDA and IBRD.  While IDA should be focused on extreme poverty and MDGs, IBRD should increasingly address the needs of larger investments in MICs, knowledge and technology transfer, institution building and global economic and financial integration.  

            The complementarity of the World Bank with the IMF and Regional Development Banks is well recognized.  However, we believe strongly that the Bank should not restrict itself to certain areas and sectors.  The Bank’s greatest comparative advantage is its global reach and global knowledge, and it should leverage its strength by playing a leading role in coordinating global multilateral responses.  We need complementarity between the world’s development institutions, not exclusivity.  We believe that healthy competition between institutions will lead to better outcomes.  So, we should not carve out jurisdictions or spheres of influence among MDBs – rather we should encourage some overlap.  

            There is substantial common ground between the Global Public Goods agenda and the primary goal of poverty removal.  Thus, issues relating to climate change have serious implications for the on-going effort to eradicate poverty.  However, there are existing international networks focused on each of the GPGs.  For instance, the UNFCCC has the primary mandate to evolve a global response to climate change, the WTO handles the global trade agenda, and the FAO is responsible for global food security.  The World Bank’s primary mandate is removal of global poverty through inclusive economic development, and consequently, the Bank should be modest about its role in addressing the GPG agenda and should complement the efforts of other international agencies. While engaging with GPGs, the WBG should always keep its primary mandate of poverty removal at the fore.  

            The recent financial crisis originated in the developed world but also had great adverse fallout in the developing countries.  Much work needs to be done in the developed countries to address the cause of the financial crisis – a more comprehensive and stricter regulatory environment has to emerge, and greater financial discipline on banks and financial institutions needs to be imposed.  The WBG should review its traditional relationship with the developed countries to focus its considerable research capability on the problems within the financial sector of developed economies, to provide policy advice to the developed countries so as to avoid recurrence of financial crises in the future.  

Internal reforms

We compliment management for the comprehensive paper on the Bank’s Internal Reform Agenda, which brings in one place the various strands of internal governance reforms being undertaken by the Bank, outlining the inter-linkages between the different initiatives, thus enabling a holistic view of a very complex process.  

            We note that the Internal Reform Agenda is focused on making the WBG more efficient, effective and accountable through three inter-linked elements, namely, modernizing and enhancing the effectiveness of the Bank’s financial and non-financial instruments, facilitating responsive and efficient delivery of client services through changes in the way the Bank is organized, and supporting more effective services through changes in policy, infrastructure and the incentives system.  

            We fully support the Bank’s initiative to modernize financial services.  The key reform is expeditious implementation of the proposed risk based investment lending model, including the new programmatic results-based instruments for investment lending.  We are also happy to note that the Bank is engaged in updating its Trust Fund Management Framework.  

            One of the key comparative advantages of the Bank is its access to global development knowledge.  Therefore, modernization of its knowledge services is an important element of internal reform.  We note that the Bank is engaged in preparing an updated Knowledge Strategy.  We urge the Bank to finalize the Knowledge Strategy for early implementation.  

            The matrix structure of the Bank has served it well in the past, but there is an urgent need now to review and update it to better address challenges and shortcomings.  We are happy to note that the Bank is engaged in a comprehensive exercise to achieve this objective.  In order to improve service delivery, the Bank needs to further decentralize, to become a truly global financial institution. We note that the Bank is proposing to strengthen its field presence, especially in Africa and fragile states, and we commend the management for this decision.  We urge the Bank to expeditiously complete its location analysis and modeling for implementing its Regional and Network decentralization plans.  

            The motivated, skilled and knowledgeable staff is a critical resource of the Bank and underpins all its comparative advantages. The Bank’s Human Resource policy must continuously evolve to ensure that this asset does not suffer any erosion in the years to come.  We urge management to complete its work and develop an HR Framework that will facilitate global recruitment and mobility, based on a redesigned performance management system and supported by a revised compensation system.  

We are happy to note that the Bank will be implementing its new Access to Information Policy this year.  This would involve a paradigm shift from its current policy based on a positive list to the revised policy which allows public access to all information within the Bank except that included in a negative list.  We in India have had a good experience with our own Right to Information Act, which led to increased transparency in functioning of government agencies, better delivery of services and reduction in corruption.  We wish the Bank all the best in its shift to the new policy.  

Conclusion

We are taking momentous decisions today, decisions that will set the direction of this unique institution for many decades to come. Our decisions will ensure that the WBG continues to play a lead role in eradicating poverty and fostering development globally, that its storehouse of knowledge and resources is put to best use. By giving the WBG a new sense of purpose and direction with enhanced governance and strength, we will ensure that the vision of its founding fathers is fulfilled.