World Bank Vice President: China’s progress shows there is not one single global growth model

The World Bank is more relevant today than it ever has been and the Asian Infrastructure Investment Bank (AIIB) is an important partner in tackling the huge infrastructure gap in Asian emerging and developing countries, says Arunma Oteh, Vice President and Treasurer of The World Bank.

As opposed to viewing the China-led multilateral as a rival, the World Bank is working very closely with the AIIB in several areas and expects to start co-financing some projects with AIIB very soon, Ms Oteh, who was previously the Director General of the Securities and Exchange Commission (SEC) in Nigeria, as well as Vice President at the African Development Bank, said.

She made the comments during an interview with Asia House before a private lunch discussion with corporate members.

The AIIB, spearheaded by Chinese President Xi Jinping and based in Beijing, was founded in December 2015 with 57 founding members, including the UK, to finance regional infrastructure development in Asia.

When it was founded, commentators speculated that China had started the multilateral development bank in frustration at the lack of infrastructure development in Asia by other banks such as the US-led World Bank.

But those suppositions were proved wrong when in April 2016 the World Bank signed its first co-financing framework with the AIIB which paves the way for the two institutions to jointly develop projects. The US and Japan, however, are notably not members of the AIIB.

So has the Washington Consensus (economic policies that the US believes countries must adopt to have economic success) come to the end of an era?

“When you see the progress that China has made over the years in lifting so many people out of poverty it shows that we need to look at what works on a case by case basis rather than be dogmatic about one method being more appropriate than another,” she said.

“What is key is inclusive growth and enabling broader economic participation through tackling the sustainable development goals. There is more openness to new and innovative ways of doing things. I also think that building vibrant capital markets helps fuel inclusive growth by mobilising domestic  resources and effectively channelling them to the most deserving projects which in turn creates jobs and fosters economic and social development,” Ms Oteh said.

“When people ask ‘Is the World Bank still relevant?’ my response is it is even more relevant today than in the past because of its leadership role in tackling the world’s most complex development challenges,” Ms Oteh continued.

“The world is so interconnected that development challenges are indeed crossing borders. That’s why the world must come together to tackle climate change, the refugee crisis, and extremism. I don’t think you can be isolated anymore as what happens in one part of the world affects the rest,” she said citing the most obvious example as the migrant crisis – the highest number of people displaced since records began.

“What we are finding is that when you have these challenging issues everyone comes to the World Bank for a solution because of our global reach and 70 year track record of developing innovative solutions for the world’s complex problems,” she said.

The World Bank has cut its global growth forecast this year to 2.4 per cent from 2.9 per cent and Ms Oteh said the fragility of the global economy was her biggest concern.

“The solution is for the world to build a resilient global economy by achieving the 17 Sustainable Development Goals (or global goals) with a sense of urgency. This will enable more people and more countries to realise their potential, broadening economic participation and enabling inclusive growth. This is why 2015 was a turning point in development history as global leaders agreed to scale up development resources from ‘billions’ to trillions’, agreed the 17 global goals and committed to taking action to keep global warming below two degrees centigrade,” she said.

She then spoke about the important role of the private sector in helping the World Bank to achieving these goals.

“To scale up development resources, we must leverage the private sector and develop domestic capital markets in developing countries. We must strengthen tax systems in developing countries and make sure that every dollar that comes from the public sector is used to mobilise the private sector so that the private sector contributes to development,” she said.

“I am not talking about the private sector doing charity, I am referring to the private sector making great returns. Investing in infrastructure in emerging and developing countries will certainly earn much higher rates than the low yields that have become the norm in the advanced economies,” she continued.

Asia has been “an important part of the global growth story in the last 10-20 years” mainly driven by the China growth story, but also those of other Asian countries that are now the fastest growing economies in the world, she said.

“Sixty per cent of the world’s GDP comes from Asia so if Asia is not working, the world is not working. Asia is an important source of global growth, she added.

She felt that notwithstanding China’s current slowdown – the country is predicted to achieve slower GDP growth of 6.5 per cent this year– that the country should be viewed as a success story.

“I think the slowdown is because China is changing from an export-driven economy to a consumption-based economy,” she said. “A country that has grown at such high growth rates and become the second largest economy in the world is bound not to continue to grow at those rates. It’s also hard for them to continue to grow significantly in isolation as global growth has declined significantly. Some of what has led that growth is significant public investment in infrastructure and therefore it’s an interesting model if you want to look at what finances and fosters growth. China is still a very important client of the World Bank as we can provide them knowledge services.”

World Bank Vice President and Treasurer Arunma Oteh with Asia House Chief Executive Michael Lawrence

She was also upbeat about the India growth story, and put the fast growth of India down to leadership and structural reforms. The Indian economy expanded 7.9 percent year-on-year in the first three months of 2016, which was much better than market expectations.  She said she had been impressed by India’s efforts to develop domestic capital markets and to streamline the processes around infrastructure given that India’s infrastructure gap has been a key constraint.

A key strategy of the World Bank is to mobilise more private sector resources into infrastructure, she explained.

“That will, for example, help address the pressures on public services as many more people in developing countries move to cities and other urban centres,” she said.

“We consider the private sector important partners to invest expertise and to co-finance transactions with us,”  she said.

Ms Oteh said that to foster inclusive growth countries in Asia need to implement structural reforms and diversify their economies, which, in turn, depends on investing in clean and resilient infrastructure.

“The World Bank invested nearly US19 billion in infrastructure last year around the world. Emerging and developing countries however need US$1 trillion to US$1.5 trillion annually to close the infrastructure gap, so this is nothing compared to what is needed,” Ms. Oteh said. “Just one per cent of the US$163 trillion, that TheCityUK estimates as assets under management globally, would be enough,” she added.

“We can’t build infrastructure without the private sector and they need us as multilateral banks, as honest brokers, between governments and the private sector. The World Bank has a track record of working with governments on developing an enabling environment for the private sector. While  the IFC [The International Finance Corporation] has many years of experience partnering with the private sector in developing countries, the MIGA [The Multilateral Investment Guarantee Agency] gives its clients additional comfort when it is involved in a transaction,” she said.

The Asian Development Bank (ADB) predicts that between 2010 and 2020, Asia will need to invest approximately US$8 trillion in infrastructure investment in Asia in order to just maintain current levels of growth. Ms Oteh said that as a result of this infrastructure gap in Asia the advent of the AIIB was “timely.”

“We need many more players in infrastructure investment in Asia. The AIIB is an institution that we have supported and many of the people at the AIIB today have some affinity to the World Bank. We are delighted to partner with them,” Ms Oteh continued.

“I assume that as part of our co-financing arrangement with them, they will leverage some of our systems that benefit from our 70-year experience. We also have a wealth of experience with structuring different transactions, as well as with using best practice safeguards and procurement procedures,” she added.

She noted that one of the reasons enough private money was not flowing into infrastructure investment in Asia was the absence of properly prepared projects. Having an appropriate regulatory environment and being able to respect the sanctity of contracts were key for the private sector, she said.

“The World Bank’s involvement in a transaction can provide comfort to the private sector player in these respects.  We have the leverage to make sure that governments ensure fairness and equity for all participants,” she added.

“One of the problems is that commercial banks have to put more capital aside because of Basel III so there is less money coming from these banks for infrastructure,” she explained.

But she said commercial banks needed to continue to provide short-term capital and she wanted infrastructure as an asset class to be better understood.

The World Bank, via its Global Infrastructure Facility (GIF), was already partnering with some of the world’s largest asset managers, commercial banks, insurance companies, pension and sovereign wealth funds, who alone represent some $12 trillion of assets, she said.

Chinese President Xi Jinping’s Belt and Road plan –  an economic belt stretching from central China through central Asia to western Europe covering over four billion people in 65 countries and over 900 infrastructure projects  – would be a boost to the global economy, she said.

She said that she understood that China had already committed significant funds to it in terms of the New Silk Road Fund and that the China Development Bank is putting resources too.

“I believe it will unlock a lot of value to global trade because of the connectivity benefits,” she said.

As for global low commodity prices, “Everyone says the commodities super cycle is over. I add that it is an opportunity for oil-exporting countries to diversify and decarbonise their economies,” she concluded.

Following the interview Ms Oteh joined Asia House corporate members for a lunch discussion on the World Bank in the global system.

Corporate members represented at the discussion included Arup, DWF, Standard Chartered, Rio Tinto, GSK, G3 and De La Rue.

naomi.canton@asiahouse.co.uk

Sir Dominic Asquith KCMG, British High Commissioner to the Republic of India, will join Asia House corporate members for a private briefing on the political and economic landscape in India on 30 June. For more information click here.

Mick Adams, Vice-President and Chairman of the Shanghai Board, European Union Chamber of Commerce in China, will present the key findings of this year’s Business Confidence Survey, which provides an annual overview of the performance of its 2,000 members and their confidence in the Chinese economy, at Asia House, on 30 June. For more information click here.