Richard Newfarmer Special Representative to the WTO and UN World Bank Geneva, Switzerland

1. The Changing Nature of Multilateralism: the Role of the World Bank Richard Newfarmer Special Representative to the WTO and UN World Bank Geneva, Switzerland December 10, 2008

2. Multilateral system is changing rapidly… • Inexorable long term trends are increasing the economic power of developing countries… • …and the challenges of globalization require collective multilateral response… and the problems of today’s world cannot be solved without their participation • One example: the near term financial crisis can only be met with a multilateral response The World Bank is responding… and changing in the process

3. Globalization and growth are increasing the role of developing countries, especially the BRIICS… Exports from developing and developed countries, 1980-2030 US$ billion $23 trln 23% BRIICs Other Developing countries 22% 18% 21% 13% High-income countries 20% 5% 55% 67% 61% 19% 76% Source: World Bank simulations with Linkage model.

4. China, India, and other developing countries will become centers of global demand over the next quarter century GDP at PPP exchange rates US$ trillion Other developing countries China USA EU India Russia Brazil Indonesia South Africa Source: World Bank simulations with Linkage model.

5. …and the share of developing countries in global output will rise… US$ trln ---GDP at Market Prices---- -----GDP in PPP------ 48% $66 tn. BRICs 23% 22% 27% Other Developing countries 18% 10% 20% 13% High-income countries 30% 52% Source: World Bank simulations with Linkage model.

6. A key driver is rapid diffusion of technology and knowledge… Millions of internet users BRIICS Source: World Bank, Global Economic Prospects (2008)

7. Globalization will portend huge stresses as economies integrate into the world economy…requiring multilateral solutions • Distribution of benefits will be uneven…hence need for development assistance • Increased trade and financial flows increases policy spillovers with potential beggar thy neighbor effects – hence the need for new disciplines and learning about policies that work (policy convergence) • Disruptions in some globalized markets could become more common -- labor markets, food and energy, and financial – hence needs for collective responses • Environmental pressures will become severe – hence needs for concerted multilateral action to protect the global commons • Migration and cross-border movement of people spread infectious diseases – hence need for coordinated health response Because of global integration and because of their increasing importance in the world economy, developing countries have to be central participants in multilateral policy actions for these policies to be successful

8. Financial crisis: Macroeconomic policy and changes in the US financial system create conditions for the perfect financial storm…with profound multilateral consequences • Excessively easy money after 2001 • Fiscal stimulus as US budget swung from surplus to large deficit • Expansion of opaque financial innovation • Subprime mortgages • Home equity lending • Consolidated Debt Obligations • Credit Default Swaps • Emergence of unregulated borrowing in the shadow banking system • Mortgage companies • Investment banks • Hedge funds • …leading to excessive leverage of consumers, corporates, and public sectors • …financed by China and other countries accumulating large reserves

9. MSCI equity price indexes, January 2005=100 Emerging markets Euro Area USA Oct-2007 The bubble bursts..and financial panic sweeps through global markets Source: World Bank, Global Economic Prospects, 2009

10. Equity markets plummet... weakening exchange rates as funds seek safety in foreign assets MSCI Equity market index ($), Jan-1 2007=100 Exchange rates, LCU/USD index Jan-01-2008 =100* * increase implies weaker local currency Brazilian real Source: Morgan-Stanley, Thomson/Datastream.

11. For emerging markets, bond spreads increased dramatically.. notably for firms Emerging-market bond spreads Jan 2007 – Dec 1, 2008 Basis points Corporate bonds (CEMBI) Sovereign bonds (EMBI Global) Source: JPMorgan Chase.

12. billions U.S. dollars Bank loan commitments Equity issuance Bond issuance …and lending freezes as banks and financial companies retrench Source: World Bank, Global Economic Prospects, 2009

13. High-income countries in recession Growth of real GDP, percent change annualized Q1 Q2 Q3 Source: World Bank and National Agencies.

14. Demand is dropping out of the world market…and trade will likely contract, for the first time since 1982 Annual growth of global trade volumes Percentage change Source: World Bank, Global Economic Prospects, 2009

15. Decline in import growth affecting exports from developing countries... Percentage change(12m/12m) Annual growth of import volumes U.S. imports Latin American exports Source: World Bank

16. Private capital flows set to decline sharply in 2009 Net private debt and equity flows $ billions Percent Percent of GDP (right axis) Source: World Bank.

17. Financial crisis rapidly spreading to real economy annualized growth of industrial production in China Source: World Bank.

18. Developing country investment growth is slowing Growth of real fixed investment, percent yr on yr Venezuela Russia Thailand Indonesia Source: Haver Analytics.

19. industrial production, ch% saar …and is dragging industrial production sharply down Developing Countries High Income OECD

20. Multilateral response: Effort at macroeconomic coordination…. • October communication among G-7 • Central bank swap arrangements • IMF moves into action – Iceland, Hungary, Pakistan • November G-20 meeting • Agreement to coordinate fiscal stiumulus • Pledge to avoid increases in protection • Agreement on long term work program and subsequent meetings • December • Efforts to conclude Doha round… (The G-20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Turkey, South Korea, United Kingdom, and the United States, with the participation of the IMF, World Bank, the EU Presidency (France), and the Chairs of the International Monetary and Financial Committee (IMFC) and the Development Committee (DC) )

21. Policy Directions as illustrated by G-20 Fighting this Crisis 1. Global Fiscal Stimulus 2. Restraining Protectionism 3. Enhanced IMF Resources Preventing the Next One 1. College of supervisors 2. Managing systemic risk 3. Oversight of Credit Rating Agencies 4. Enhanced disclosure/common accounting Reflecting New Realities/Enhancing Legitimacy 1. G-20 or G-8? 2. Developing countries in Global Stability Forum, IMF , WB

22. World Bank’s role… • Distribution of benefits will be uneven…hence need for development assistance • Increased trade and financial flows increases policy spillovers with potential beggar thy neighbor effects – hence the need for new disciplines and learning about policies that work (policy convergence) • Disruptions in some globalized markets could become more common -- labor markets, food and energy, and financial – hence needs for collective responses • Environmental pressures will become severe – hence needs for concerted multilateral action to protect the global commons • Migration and cross-border movement of people spread infectious diseases – hence need for coordinated health response

23. The World Bank’s role… • Provide financial resources for investment • directly through loans -- $25 b. in 300 loans in 100 countries • Indirectly – guarantees and insurance • Co-financing – 130 projects for $6.3 b. • Manage trust funds – 900+ for $5.0 b. • Provide knowledge about what works in poverty reduction and what doesn’t • through policy advice – 500 studies • technical assistance – 450 TA activities • bringing people together - learning • Provide “public goods” • Data and comparative indicators of policy (trade, finance, doing business, debt) • Research into what works and what doesn’t • Advocacy of global policies that affect poor • Global environmental work and infectious diseases

24. The World Bank’s strategy at the country level… • Invest in people to empower the poor • Basic social services and program that target the rural poor and women • Bank lent $40 billion for more than 500 projects for human development in 100 countries. • Promote pro-poor growth to raise living standards and reduce poverty • Create an investment climate conducive to private sector expansion • Macro stability • Property rights • Efficient business regulation • Improve governance • Invest in infrastructure • Protect the environment so that growth is sustainable • Invest $1.5 b. annually in environmental projects • Invest $6 b. in energy and clean infrastructure • Manage Global Environmental Facility and Montreal Protocol • …Larger financier of environmental projects in world

25. What are the Origins of the World Bank? As an International Organization • born after World War II as the International Bank for Reconstruction and Development • to help countries reconstruct after the war -- focus on infrastructure and industry • part of the extended UN family, but separate governance structure • owned by 185 countries with votes according to paid in capital • US largest shareholder (16%) • Japan now second largest (15%) • 24 Executive Directors

26. The World Bank Group comprises five organizations with differing instruments… THE WORLD BANK GROUP International Bank International International Multilateral International Center for Reconstruction Development Finance Investment for the Settlement of and Development (IBRD) Association (IDA) Corporation (IFC) Guarantee Agency Investment Disputes • Offers mediation and arbitration services for investors in developing countries • Supports investors in developing countries • Provides political risk insurance • Backed by shareholder capital • Supports the private sector in developing countries • Provides loans and equity investments • Funded through bonds, backed by shareholder capital • Supports the world’s poorest countries • Provides soft-loans and grants plus debt relief • Replenished every 3 years by donors and through IBRD income • Supports middle-income countries • Provides loans at AAA terms plus cost spread • Funded through bonds, backed by shareholder capital

27. The World Bank is deploying various instruments to respond to the crisis • IBRD: commitments of $100 billion over the next three years • IDA: Front load commitments from US$42 billion • IFC: about $30 billion over the next three years • Expanded trade finance program from $1.5 billion to $3.0 billion over a three years to benefit participating banks based in 66 countries • Bank Recapitalization Fund to recapitalize distressed banks for US$1 billion over three years ; Japan has invested US$2 billion to the fund. • Infrastructure Crisis Facility is to provide roll-over financing and help recapitalize existing, viable, privately-funded infrastructure projects facing financial distress with investments of US$300 million to mobilize between US$1.5 billion and US$10 billion from other sources. • Multilateral Investment Guarantee Agency planned support to projects in Ukraine, Russia, and Eastern Europe, and Africa.

28. Conclusions: Strengthening the multilateral system requires…. • Incorporating new powers into the multilateral system • Designing fora like the G-20 to bring countries together around cooperative collective actions to solve real problems • Using the World Bank, among other multilateral institutions, in global cooperation to fight poverty, improve the environment, and raise living standards

29. References and Further Reading Roubini, Nouriel, Roubini Global Economics www.rgemonitor.com Global Sach, Jeffrey The Common Wealth: Economics for a Crowded Planet, 2008 World Bank, Global Economic Prospects, 2007 Managing the Next Wave of Globalization, Washington: World Bank World Bank, Global Economic Prospects, 2009 Commodities at the Crossroads, Washington: World Bank World Bank, www.worldbank.org/prospects Zoellick, Robert “Modernizing Multilateralism and Markets” Speech to the Peterson Institute, October 2008 http://intranet.worldbank.org/WBSITE/INTRANET/UNITS/INTPRESIDENT2007/0,,contentMDK:21927552~menuPK:64821535~pagePK:64821348~piPK:64821341~theSitePK:3915045,00.html

30. The Changing Nature of Multilateralism: the Role of the World Bank Richard Newfarmer Special Representative to the WTO and UN World Bank Geneva, Switzerland December 10, 2008