Reform the World Bank and save developing countries from China’s grasp

One of my proudest achievements in government was meeting Britain’s commitment to spend 0.7 per cent of its national income on overseas development. From that fraction flowed some much bigger numbers. Eleven million more children going to school. Twenty-four million mothers and children getting the nutrition they need. Sixty million more people accessing clean water and sanitation. Millions more protected from diseases such as malaria and polio. It was a promise made to the world’s poorest countries – and one that I made sure we kept.

In 2020, the 0.7 per cent commitment was broken. I said at the time that it was a mistake. But I am a realist. Money is tight. Yet the need for investment in developing countries is greater than ever.

The Covid-19 pandemic, Russia’s invasion of Ukraine and catastrophic climate change have been a triple whammy for the poorest nations. Take sub-Saharan Africa. The combination of job losses, crop failures, disrupted supply chains, school closures and increased import prices has been devastating. In the three decades after 1990, the proportion of people living in extreme poverty fell from 38 per cent to just 8 per cent, It is now rising.

Addressing poverty and climate change doesn’t come cheap. It is estimated that $1 trillion more external financing every year will be needed for investment in the green-energy transition and sustainable development, at a time when many rich governments’ revenues have fallen and the price of borrowing has increased.

There is no simple answer to this conundrum, but one of the most important steps we could take is reforming “multilateral development banks” (MDBs). Few people have heard the term, but everybody knows the most famous examples: the World Bank and the International Monetary Fund (IMF). Every continent is served by its own regional establishments.

These institutions have the world’s leading economies as guarantors. They have AAA credit ratings. Their loans are almost always repaid on time. And they do an amazing job of lending to developing countries where commercial finance is limited. You can see the impact of MDB loans and assistance right across the world, from a windfarm in Turkey to a toll road in Indonesia and hospitals in Rwanda.

MDBs can do even more. Experts estimate that, with more than $1.8 trillion in assets, MDBs could lend an extra trillion dollars. They could use their balance sheets more effectively and increase their appetite for risk by changing the way assessments are made. They could act across countries, rather than solely with individual governments. They must become more transparent and work more closely with private capital. They should focus on small- and medium-sized firms, rather than just big infrastructure projects, and give a greater say to developing countries.

Crucially, they could do far more to direct assistance to the fragile states where the need is greatest and whose continued failure – and potential threat of collapse – has such dire consequences for the people who live there and the rest of the world. The drivers of poverty and insecurity overseas are the same things that threaten our security at home. Think of Somalia and the problems of piracy, mass migration and terrorism.

Reform would help with the sluggishness that besets these institutions; the World Bank takes about 465 days to distribute funds.

Why haven’t the changes happened? Reform is difficult when it comes to multilateral organisations. No single government can effect change on its own. To achieve reform, leadership is essential. A prime minister or president – or several – must take this issue and make it their priority. It often takes one person in a position of power to cut through the inertia and bang the table until things change.

Britain could take the lead. We have very relevant experience. Our own Commonwealth Development Corporation (CDC) – now called British International Investment (BII) – carries out similar work to an MDB. When I was in office, we recapitalised it and radically altered its focus. Instead of being a passive investor in funds run by other institutions, it started to lend and invest more aggressively. It switched its focus to the most fragile states. Today, BII is widely imitated. The US has recently established an institution that in many ways is modelled on BII.

If MDBs are reformed they will prove a counterweight to China’s influence in the developing world. Through its Belt and Road Initiative, China is lending vast amounts for huge infrastructure projects. The appeal to borrowers is that these loans have fewer conditions attached than those of traditional Western institutions. But they are saddling countries with debts they can ill afford to repay. The reach is wide: since 2017, China has become the world’s largest official creditor, surpassing the World Bank, IMF and traditional creditors combined. However, there is little point complaining about countries signing up for the Belt and Road if we can’t say to them “here’s the alternative”.

It might not be as catchy as “make poverty history”, but “expand MDBs’ balance sheets” is the next big imperative in the fight against poverty. MDBs can expand their balance sheets and lend more without losing their vital AAA credit rating. As the world of development finance convenes for its annual spring meetings, it is time for lenders to seize this opportunity. Britain should be in the vanguard.

David Cameron was prime minister from 2010 to 2016